eddie yue : islamic finance – its potential to bring new economic growth to hong kong keynote address by mr eddie yue, deputy chief executive of the hong kong monetary authority, for the hong kong islamic finance forum, hong kong sar, 25 november 2008. * * * ladies and gentlemen, i would like to thank the organisers for inviting me to speak at this forum, which is being held in hong kong for the first time. in the past several months, we have witnessed the unfolding of a global financial crisis. the sub - prime problem in the us and the ensuing credit crunch in the industrialised economies have spread and brought about a weakening of confidence in the solvency of the financial system. concerns about credit risk exposures among financial market participants mounted following the failure of lehman brothers. interbank money markets in many economies came under extreme pressure or seized up entirely. extraordinary and concerted efforts by governments and central banks to restore confidence, inject liquidity and recapitalise the banking system appear to have paid off to the extent of preventing the collapse of the banking and financial system although credit and money markets remain stressed. as the turmoil deepened, people have also focussed attention on the wider impact of the crisis on the real economy, leading to a grimmer outlook for global economic performance. against the backdrop of this global financial crisis, islamic finance is inevitably affected and subject to challenging conditions reflected by a steep slowdown in activities such as sukuk issuance and declines in equity value managed by islamic funds. new sukuk brought to the market in the first three quarters amounted to some us $ 13 billion, down 40 % from the same period last year. 1 but the pullback in new sukuk issuance and the widening of sukuk yield spreads are generally in line with what has been happening in the conventional market. this broadly suggests that the global sukuk market slowdown has more to do with the general market conditions and a general reluctance to issue us dollar instruments. observers say that while there are still those who wish to issue sukuk, investors would prefer to stay on the sidelines in the current volatile market environment. it is true that the industry is experiencing a temporary setback, but this also reflects how closely integrated islamic finance is with the global financial system, which is not at all bad news for the industry because when global markets stabilise and take a turn for the better – as they must in the long run – islamic finance will ride on that

explain the slowdown but that these effects are transitory. 1 see deputy governor henry ohlsson ’ s speech on 18 march 2016 “ decision today, consequences far into the future ”, for a longer review. bis central bankers ’ speeches lower real interest rates and inflation but it is not merely real interest rates that have fallen. in recent years, inflation has also shown a downward trend. this trend began later than the decline in real interest rates, but swedish inflation began to fall slightly before that in other western countries such as the united states and the euro area. the most recent downturn in inflation in the euro area can to some extent be explained by the fall in energy prices. however, underlying inflation has also fallen in the wake of both the banking crisis and the euro crisis. it is necessary to take into account the decline in both real interest rates and inflation in the monetary policy deliberations. the fundamental reasoning regarding the stabilisation ability of monetary policy with a floating exchange rate is based on the assessment of a normal nominal interest rate, simply described as an interval for a nominal interest rate that neither speeds up nor slows down the economy. to estimate how high the normal nominal interest rate should be, we look at the real interest rate and add to this the inflation target. if the real interest rate is 2 per cent and the inflation target is 2 per cent, then the nominal interest rate should be around 4 per cent. if the real interest rate rises to 3 per cent, and the inflation target remains unchanged at 2 per cent, the nominal interest rate will be 5 per cent, and so on. but as i have just shown, developments are instead showing a downward trend. lower real interest rates and lower inflation and inflation expectations are pushing the nominal interest rate downwards. this means that the central bank has to take stronger action for monetary policy to have a stimulating effect. some important questions are raised here : what are the fall in real interest rates and the downturn in inflation due to? are these temporary or permanent changes? are the central banks over interpreting their price stability task or have they not done sufficient to cure the low inflation? some say that all things bad are mostly the fault of the central banks. i believe that part of the intensive debate on monetary policy conducted both here in sweden and abroad is due to us economists tending to have different answers to these questions. these answers in turn affect the opinions on what is the best policy in both the long and the short term. how