The low pay increases in this year’s wage settlement may indicate that the social partners are placing more emphasis on the negative effects of large pay increases on future developments in interest rates, the krone exchange rate and  BIS Review 50/2003  5  employment. We expect that in the light of the experience gained in 2002, public entities will exercise more caution in future wage settlements. Expectations of moderate wage growth are supported by the labour market outlook. The monetary policy easing since last December will boost demand, primarily through private consumption and gradually through business investment. The increase in petroleum investment will also contribute to higher demand for Norwegian products and services. As global demand picks up and excess capacity in service industries is reduced, demand for labour may rise in other sectors of the economy. Unemployment is expected to edge down again. The aim of monetary policy in the period ahead is to achieve a higher level of inflation. The key rate has been reduced with a view to bringing inflation back to target at the two-year horizon. Analyses in the October Inflation Report indicate that inflation will move up and stabilise around the inflation target at the two-year horizon. The real economy is projected to be approximately in balance, with an output gap, as we measure it, that is slightly positive.
For tail risks in particular, the dark corner where we shine the light may not necessarily be the place where those risks reside. Many of the risks inherent in Islamic Finance are similar to those of conventional finance, including credit risks, market risks, market conduct risks, operational and reputational risks. However, the exposure to those risks could differ between conventional and Islamic finance. For instance, Islamic banks are generally exposed to substantially more liquidity risk than their conventional counterparts, as the range of liquid instruments and hedging instruments are more limited. Islamic banks tend also to be more exposed to the property and infrastructure sectors, in part because these are the prevalent asset classes in the Gulf and also in part because Islamic finance has to be based on physical assets. Given the “large and lumpy” nature of such transactions and the tendency for asset bubbles to build up quickly, it is a risk that merits special attention. In addition, there are also risks unique to Islamic Finance such as Shariah-compliance risk. If products are later found to be non-Shariah compliant, the institutions not only face reputational damage, but also costly unwinding of such structures, with possible losses to investors. The third point is that to achieve a good outcome, an effective regulatory approach needs to embrace a tripartite approach. Regulators, financial institutions and investors all have a role to play. Allow me to share briefly the approach that MAS takes.