Rises in international goods and energy prices pose a particular challenge to UK monetary policy. Not only do they exert a strong direct influence over inflation as I’ve discussed, but – since the UK is a net importer of food, energy and goods – they also imply a squeeze on the real incomes of UK households. Simply put, the price of what the UK is selling has fallen relative to what the UK is buying, leaving UK residents worse off. So the MPC forecasts that, as we move towards the end of this year, this real income squeeze coming from higher international energy and goods prices will slow domestic demand and eventually result in higher unemployment and a looser labour market. That loosening does much to cool the domestically generated wage, cost and price pressures on which the MPC is rightly focused. It is this component of inflation over which UK monetary policy exerts greatest influence. That said, the bulk of the forecast decline in headline inflation in the MPC’s baseline projection owes to the assumption that energy prices will stabilise. Mechanically, the assumption of constant gas and oil prices – what economists call a ‘random walk forecast’ – that is embodied in the MPC projections beyond the next six months implies a zero contribution of energy prices to UK headline inflation in eighteen months’ time, in stark contrast to the strong positive contribution seen over the past eighteen months.
Positive transformations taking place around us will continue to pave the way for new growth opportunities for the industry. Collectively, we need to understand these developments and leverage on them to advance economic and social goals, and manage the attendant risks. Today, I would like to touch on three key issues, the rise of fintech and its impact on Islamic finance, the growing importance of responsible, inclusive and sustainable finance and the preconditions necessary to sustain a value-based financial system. One of the most significant transformational developments of our era is the technological revolution. More specifically, the fintech revolution was made possible by maturing social, mobile and cloud technologies. The digital revolution and widespread penetration of technology-driven applications in nearly every segment of the financial sector is already upon us. Fintech innovations are fundamentally altering the way we experience and deliver financial products and services. According to a recent McKinsey report, the number of fintech start-ups globally has now exceeded 2,000, more than twice the number less than a year ago. Such growth is expected to continue as innovators tap into the preferences of millions of technology savvy millennials who are more receptive to new ways of consuming financial services. Fintech is challenging the status quo of the financial industry. New business models will emerge. Delivery channels will challenge existing norms. Transaction costs will be reduced. Rather than looking at the fintech revolution as unwelcoming, financial institutions ought to embrace it as an opportunity.