It had lowered its DFR all the way to zero and had even begun to reduce it further, reaching an annual interest rate of -0.2% in late 2014. But even at these very low interest rates, the economy remained sluggish, and inflation stayed persistently below the ECB’s target (at the time, an inflation rate below, but close to, 2%), even falling occasionally into negative territory. In these circumstances, the ECB had to reach for new, “unconventional” tools to meet its inflation target. In particular, the ECB initiated a rapid expansion of its balance sheet, both  4  By way o f illustratio n, in the latest SMA, the median respo ndent anticipated that the DFR wo uld reach 2.5% in the seco nd quarter o f 2023. 5  While the central bank can set any interbank interest rate abo ve zero , it canno t set that rate far belo w this thresho ld, because then ho useholds would simply hold o nto cash – thereby receiving a 0% interest rate – rather than save at negative rates, and banks wo uld start co nverting their electro nic reserves – yielding a negative return – into currency. Banks can o ffer depo sits at zero rates to avo id this risk of ‘financial disintermediation’, thus absorbing the adverse impact o f negative interbank rates themselves. In the lo ng run, this may reduce banks’ pro fitability, which may h amper the bank mo netary po licy transmissio n channel.
An important aspect of the recent developments to strengthen Islamic financial services industry is that this is being undertaken during the stable and good times. This will position Islamic finance to deal with future challenges. A clear indication of that is the growing relevance and importance of the sukuk market. This event in Kuala Lumpur is commemorating the talent, expertise and the successes of the Islamic financial community. BIS Review 95/2010  3