. that may also reflect a more volatile environment for real wages shocks ( i. e. to the terms of trade and productivity ). nor are floating exchange rates a guarantee of stable inflation : during the 1970s and 1980s, when there was no stable nominal target at all, this correlation rose to 0. 9. but inflationary shocks appear better contained with a domestic inflation target than an exchange rate or commodity peg. bis central bankers ’ speeches chart 13 inflation more persistent under fixed exchange rates chart 14 uk inflation persistence fell after introduction of inflation targeting 1. 6 estimated coefficient in regression of uk inflation on lagged inflation, 20 year rolling window consumption deflator 1. 2 gdp deflator 0. 8 0. 4 0. 0 source : bordo and eichengreen ( 1999 ), imf and oecd. note : blue shaded area represents + / - 2sd around diamond central estimate of a panel regression ; sample 1960 - 2010. source : ons and hills, thomas, dimsdale ( 2010 ). conclusion : policy should be flexible but don ’ t over - react to low inflation we ’ ve heard a lot about the risk that deflationary expectations persuade people to defer spending. we ’ ll no doubt hear it again if inflation were to dip below zero over the next couple of months. but it ’ s at best a partial point. all else equal, the incentive to save depends not on inflation expectations per se but on how far away they are from the nominal interest rate, i. e. the real interest rate. by any measure – even if you use the near - term household surveys as measure of inflation expectations – the real rate is extremely low, and still negative ( chart 15 ). the extensive empirical evidence for this “ inter - temporal substitution ” channel is in any case relatively weak – as the governor pointed out recently, the more important threat, particularly in developed economies with large balance sheets, is debt deflation. and in that regard, it ’ s the gap between interest rates and nominal income growth that matters. notably, nominal income growth has not declined of late. real interest rates still need to be low. our inflation target is 2 % not zero : what makes the current position “ good ” is not low inflation per se but the fact that, in this particular instance, it ’ s been caused by something ( a drop in oil prices ) that improves real incomes. even though the direct effect of that decline will drop out of the annual comparison

promote self - regulation : • first, ais should strictly follow the code of banking practice, which is issued by their own industry associations. they should comply not only in form but in substance as well. for example, in relation to debt collection, it is not enough that they have incorporated the relevant provisions of the code into the service agreement with their debt collection agents. they should also pro - actively check that their agents are actually following these provisions when collecting debts. • secondly, ais should ensure that all complaints are dealt with fairly and thoroughly. again it is not enough that there are efficient complaint handling policies and procedures in place. it is more important that such policies and procedures are conscientiously implemented by their staff. where a complaint is justified, ais should be prepared to offer the complainant restitution or compensation. • thirdly, ais should ensure adequate levels of transparency in the provision of banking products and services. this is very important given the proliferation of more innovative and sophisticated products in the retail banking market. ais must let their customers know the true cost of credit and ensure that all advertising and promotional materials do not contain misleading information. self - regulation would not be a success without the involvement of the industry associations. over the past six months, the industry associations have taken on a much more active role in developing the code of banking practice. they have set up the code of banking practice committee, which has so far been effective in enhancing the role of the industry in self - regulation of market conduct. the committee has responded effectively and promptly to public concerns about banks'business practices by providing appropriate guidance on interpretation of the code or even amending relevant provisions of the code. the question of the industry associations'involvement in resolving customer disputes, whether or not these are related to the code, is more controversial. although the hkab ordinance does provide the association with certain powers in relation to conduct regulation, the principal concern is whether such an industry - run scheme would have the necessary credibility, since banks would effectively be policing themselves. the rapid growth in number of complaints is a cause of concern but not a cause for alarm. the current framework of self - regulation by the industry has worked reasonably well in the past and there is no reason why it cannot continue to do so with a bit of help from banks themselves. we should monitor the situation carefully before rushing into other costly options. meanwhile, the banks must help by tackling the problem at source : through being careful to avoid