The challenges of managing liquidity in Islamic finance banks As well as supporting the safe development of new types of Islamic finance, we also recognise some of the challenges facing more established parts of the sector. Islamic banks, for instance, have long faced profound challenges in efficiently managing their liquidity, and it’s here that the Bank of England’s new non-interest based central bank deposit facility is designed to help level the playing field. All banks need to manage expected and unexpected outflows, eg as depositors make payments and withdrawals. Conventional banks hold a range of high-quality liquid assets to meet those obligations, including cash and central bank reserves; government and corporate debt; and asset backed securities and commercial paper. They can also borrow in secured and unsecured money markets and, as a backstop, from central banks. 17  http://documents1.worldbank.org/mwg-internal/de5fs23hu73ds/progress?id=wYC7RO1Zn_OMlVWKvBTqqxD6WoVnUClPU3g5WCRi6Y,&dl. 7  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  7  But Islamic banks’ prohibition on the payment or receipt of interest means they can’t access many of these tools. To avoid being caught short, they have historically had to structure their business in inherently narrow or inefficient ways, for example by holding large stocks of non-interest bearing cash, or limiting their offerings of short-term deposits. Ironically this left them relatively well placed to weather the Global Financial Crisis of 2008-09: in aggregate UK Islamic banks remained liquid, in a market where liquidity was otherwise very scarce.

According to Eurostat’s flash estimate, euro area annual HICP inflation fell to 2.2% in November 2012, down from 2.5% in October and from 2.6% in the two previous months. On the basis of current futures prices for oil, inflation rates are expected to decline further to below 2% next year. Over the policy-relevant horizon, in an environment of weak economic activity in the euro area and well-anchored long-term inflation expectations, underlying price pressures should remain moderate. This assessment is also reflected in the December 2012 Eurosystem staff macroeconomic projections for the euro area, which foresee annual HICP inflation of 2.5% for 2012, between 1.1% and 2.1% for 2013 and between 0.6% and 2.2% for 2014. Compared with the September 2012 ECB staff macroeconomic projections, the projection range for 2013 has been revised downwards. In the Governing Council’s assessment, risks to the outlook for price developments are seen as broadly balanced, with downside risks stemming from weaker economic activity and upside risks relating to higher administered prices and indirect taxes, as well as higher oil prices. Turning to the monetary analysis, the underlying pace of monetary expansion continues to be subdued, taking into account developments over several months. Most recently, the annual growth rate of M3 increased to 3.9% in October, from 2.6% in September, while M1 growth accelerated to 6.4% from 5.0% over the same period. These developments are partly due to a specific transaction leading to an increase in overnight deposits belonging to the non-monetary financial sector.