But, absolutely crucially, we also face a nasty shock to costs from rising commodity prices and sterling’s depreciation. That is going to push up UK inflation over the next few months, creating a risk of upward pressure on pay and higher inflation expectations. The MPC’s strategy to date has been clear: to offset part but not all of the shock to demand, consistent with an overriding determination to maintain medium-term inflation expectations anchored to the 2% target. The path of rates will depend on judgments about the balance of those risks to the inflation outlook. And, in the context of my remarks today, that is different from a “mopping up” strategy involving simply reducing rates enough to offset estimates of the effect of the demand shock plus some insurance on top of that. Central bank liquidity policy: the Social Contract If monetary policy has been constrained in alleviating the consequences of the financial turmoil, so too, for different reasons, has central bank liquidity policy in many centres. For over a century – coincident with the development of central banking – there has effectively been a Social Contract between the banking system and the authorities. On one side of the Contract, commercial banks have been permitted to profit from maturity transformation, turning liquid savings into illiquid loans. Commercial banks’ ability to do this relies on their deposit liabilities being a universally acceptable means of payment, money. But maturity transformation – borrowing short to lend long – is risky; it relies on confidence.

These ground-breaking initiatives are aimed at providing operational flexibility, cost effectiveness and conducive environment for Islamic finance business in international currencies : i.  grant approval under the existing Islamic banks and takaful licence to set up International Currency Business Units within these institutions. ii. issuance of new conditional licences for the setting up of International Islamic Banks and International Takaful Operators under the Islamic Banking Act and Takaful Act respectively to qualified foreign and Malaysian financial institutions to conduct business in international currencies. BIS Review 75/2006  1  iii. Labuan offshore Islamic banks and the Islamic divisions of offshore banks as well as offshore takaful operators have been given greater flexibility in their business operations to open operation offices anywhere in Malaysia with minimal presence in Labuan. The Government is finalising an attractive tax package to ensure our competitiveness in the global market place. This policy should be capitalised by the existing Islamic financial institutions in Malaysia, as well as for the new players to take the opportunity to establish their presence in Malaysia. We realised that a successful Islamic financial centre cannot depend on low cost alone but much depending on the overall efficiency in the delivery system. To ensure this, the MIFC Executive Committee comprising a high-powered group of 28 top officials from the relevant Ministries, Government Departments and Agencies, the key financial and market regulators, and industry representatives from the banking and takaful sectors has been set up.