And our decision to leave interest rates unchanged in January reflected that view. Although house prices do not enter the CPI directly, the Committee will continue to monitor the housing market as carefully as before in order to assess the implications for the inflation outlook resulting from changes in the balance between nominal demand and supply and in the exchange rate. Equally, economic decisions made by businesses and individuals over the next year or so should be unaffected by the change in the target. If the degree of underlying inflationary pressure remains  2  BIS Review 5/2004  unchanged, and there is no difference in the stance of monetary policy, then the rates of increase of wages, earnings and prices that are consistent with the new target are no different from those which were compatible with the old target. In other words, wage bargaining should be unaffected by the switch in inflation target - as should price setting by firms. Of course, the new target will make clearer how much of an increase in money earnings represents a real rise in living standards - a pay increase of 2½% that was described as a “cost of living” rise under RPIX will now be shown by the CPI as a ½% increase in real pay, even though no individual price has changed. The MPC will still need to monitor carefully developments in the labour market in case they signal a change in costs that might threaten the target in future.

Having already achieved remarkable growth and development over the recent decade, the continued success and viability of Islamic finance will also depend critically on ensuring focus on preserving financial stability. While contractual relationships and obligations may be different under Islamic finance, thus requiring different risk governance arrangements and skill sets, both conventional and Islamic financial institutions are exposed to similar risks including credit, market, liquidity and operational risks. For these reasons, the relevance of reforms to strengthen capital and liquidity buffers such as that under Basel III also extends to Islamic financial institutions and their universal implementation is important to avoid competitive distortions and regulatory arbitrage. Beyond prudential standards however, ensuring strong adherence to Shariah principles is central to delivering the financial stability benefits that were found wanting in conventional financial systems prior to the global financial crisis. In addition, the agenda to promote fair, responsible and professional conduct by Islamic financial institutions and more empowered consumers must be equally advanced. In Malaysia, the new legal framework for Islamic banking and takaful that recently came into force is set to pave the way for the development of an end-to-end Shariah compliant regulatory framework, reinforcing the effective application of Shariah principles in the conduct of Islamic financial institutions. It is encouraging to see that substantive progress has been made in respect of the development of prudential standards for Islamic financial institutions and the cooperation arrangements that are taking place to facilitate the implementation of these standards at national levels.