More recent efforts have focused on strengthening regional financial integration which is aimed at promoting the more efficient intermediation of funds in Asia. The strengthening of domestic demand and the greater regional financial and economic connectivity within Asia has also enhanced the resilience of the region. BIS central bankers’ speeches  1  Islamic finance in the evolving new frontier in Asia Given that Islamic finance is a form of financial intermediation that is closely linked to the real economy arising from its requirement that financial transactions needs to have an underlying economic transaction, its accelerated growth and dynamic expansion across the financial landscape in Asia brings with it the tremendous potential to reinforce the transformative trend that is characterizing the region. With greater liberalization, Islamic finance is increasingly supporting regional and international trade and investment flows, intermediating significant cross border financial flows. With its internationalisation, Islamic finance has become an increasingly more important channel for the efficient allocation of Asia’s surplus funds towards productive investments in the region. This trend is also contributing towards the strengthening of global financial and economic linkages, particularly between Asia and the Middle East. The vast population in Asia and the growing middle-income group, combined with high savings rates in the region have substantially heightened the demand for a wider spectrum of financial products and services. These trends have increased the opportunities in retail and investment banking, takaful, and fund and wealth management businesses in the region.

The origins of the present approach go back to 1992, when the Conservative government adopted an inflation target as the centrepiece of a package of reforms designed to rebuild credibility with financial markets in the wake of sterling’s abrupt departure from the ERM. This approach - which came to include the popular “Ken and Eddie show” - proved successful in establishing a track record of low and stable inflation. In 1997, the incoming Labour Government “entrenched” this success by handing the operation of monetary policy over to the Bank of England and setting out a detailed institutional and legal framework for the conduct of monetary policy. The result was to depoliticise interest rate decisions, within a framework of accountability that left the Government clearly in charge of setting objectives for inflation. Taking operational monetary policy decisions out of the hands of politicians was a decisive step. The touchstone of a successful monetary policy framework is its credibility. If people believe policy makers will always act to keep inflation low, this expectation will itself put a brake on inflationary wage and price increases. Economists long argued that it was difficult for politicians to make a fully credible commitment to low inflation. And perceptions are what matter: even if a government has no intention of manipulating  BIS Review 71/2004  1  monetary policy for political ends, as long as firms, workers and financial markets entertain that as a possibility, the job of keeping inflation low will be that much harder.