For example, the outlook for world growth is based on the Consensus Forecast and the International Monetary Fund’s projections published in its World Economic Outlook. The outlook for commodity prices generally follows the futures market prices. Of course, these projections are imperfect – all projections are inherently uncertain – and the Board places particular emphasis on the risks and threats that may cause deviation from the baseline scenario. Thus, while making the baseline scenario as realistic as possible, the important discussion centers on analysis of the deviations from it and, above all, what are the implications for monetary policy that are coherent with our inflation target. To make this most likely scenario more useful, we need to consider not only the external economy but also discuss the outlook for the key variables of our own economy, particularly exchange rate and interest rate. 1 To project the path of exchange rates, we use the interest rates parity, that is, the exchange rate varies according to interest rate differentials. If the domestic interest rate is lower than the international interest rate (adjusted for risk premiums), the exchange rate can be expected to depreciate. Furthermore, we have to make some assumption about where the exchange rate will be in the long run. For this purpose, we assume that if at the moment of making the forecast the real exchange rate is consistent, within a reasonable margin, with its long-term fundamentals, it will remain at the current levels in the long run.

Two elements are vital in this process. The first is to ensure that the domestic intermediation process remains strong so as to support domestic demand. And secondly, the fiscal stimulus is key to containing the effects of the external developments and to placing Malaysia in a position to resume growth once conditions in the global economy stabilises. During this challenging period, financial institutions including Islamic financial institutions have an important role to ensure the continuous access to financing by the private sector. Key to this, is the forward looking business strategies being adopted by banking institutions, the organisational structure and the operational capability that is put in place. I would like to take this opportunity to highlight two other important dimensions in the development of Islamic finance, going forward. For more than two decades, the Islamic financial system in Malaysia has gradually transformed into a comprehensive Islamic  BIS Review 25/2009  1  financial landscape. This has been reinforced by a legal and regulatory framework, the essential financial infrastructure, and an environment conducive for product innovation. Notwithstanding the success of Islamic finance, the global ramifications of the crisis also calls for more concerted efforts to bring the industry to a higher level of resilience. Of importance, in this process, is to embrace the values of Islamic finance of justice and fairness that benefits the society and the system. It is thus important for Islamic finance to transcend beyond just the pursuit of growth and monetary performance but also to emphasise ethical market conduct practices.