Therefore, the inflation outlook in two years may be viewed as a derived objective in monetary policy. In some situations, where unexpected events lead to an inflation rate that is too high, it may be appropriate to apply a longer time horizon than two years. For example, reducing inflation to 2½ per cent within this time horizon may be associated with unnecessary real economic costs. A precondition for applying a longer time horizon is that there is clear evidence of strong confidence in low and stable inflation over time on the part of economic agents. Gradually, as we gain experience with setting interest rates according to an inflation target, the possibilities for placing emphasis on stability in the real economy will probably increase. Low and stable inflation is a necessary precondition for stability in the foreign exchange and financial market and the property market. However, there have also been episodes where bubbles have accumulated in these markets, in the form of sharp increases in asset prices, while inflation has been low. Price increases in property and financial markets may have a considerable impact on wage growth and consumer price inflation after a period. When the bubbles burst, the result may be an economic downturn. In this way, developments in financial and property markets may be a source of a more unstable inflation environment. In principle, it would be appropriate to use the interest rate to counter this. In practice, however, it is difficult to assess whether price trends in property and financial markets are sustainable.
Islamic securities has also maintained its dominance in the Malaysian bond market, accounting for 58% of total bond market. And almost two thirds of the equity market comprises Shariah compliant securities. Growth has also been experienced in the takaful sector in which the funds asset has registered an increase by 8.2%. This recent decade has also seen the increase in number of Islamic financial institutions including full-fledged Islamic banks, development financial institutions that engage in Islamic banking, takaful, re-takaful and capital market intermediaries. Several of these players have strategic partnerships with foreign players. In April this year, as part of the liberalization initiatives announced, new mega Islamic banking licenses and up to two family takaful licenses will be issued this year. On the global front, Islamic financial assets are projected to grow to USD1.6 trillion by 2012 while the global sukuk outstanding valued to date at approximately USD152.8 billion. In the third series of this seminar in 2007, the vital role of a strong legal and Shariah framework in the sustainable development of Islamic finance was extensively discussed. It is key to providing certainty and predictability to financial transactions. The current international financial crisis has demonstrated the importance of recognizing that the rapid transformation of the functioning of the international financial system had to be accompanied by the need to ensure that regulatory and legal framework was aligned with these developments.