This is a question that has been much discussed in recent years, both between central banks and within the academic world, as house prices have risen rapidly in many countries, including Sweden. This debate could in itself be a subject for a speech, so let me just briefly mention that the Riksbank’s view is that we do not consider it reasonable to completely ignore these risks, although it is not possible to give consideration to the risks in any simple manner in the normal forecasting process. We have therefore acted to reduce these risks to some extent and to contribute to a smoother adjustment in indebtedness and house prices. The approach we have chosen has in practice only meant a fairly marginal change in the timing of our interest rate decisions. Neither household indebtedness, house prices, nor other asset prices have any significance for monetary policy in themselves, apart from their effects on inflation and the prospects for the macro economy. The inflation forecast and future interest rate developments As I mentioned earlier, our work procedures have changed and developed over time. This is natural. We have had new experiences and been given new conditions along the way. As recently as three days ago, we members of the Executive Board of the Riksbank decided to change the assumption for the policy rate on which we base our forecasts – this is a step in our work on improving the bases for our monetary policy decisions and our communication.
The outreach has also been targeted at small and medium sized businesses. This process will also prompt the financial industry to increase innovation to strengthen their competitive position. This can be reinforced by market research to enhance the understanding of customers’ distinct financial needs and their risk tolerance and therefore enable the design of Islamic financial instruments that offer tangible benefits and value to customers. In addition, with increased disclosure and transparency on the manner in which Islamic financial transactions are being conducted and on how Islamic financial contracts are being executed as well as on the risk and return profiles of financial products, this will further strengthen the role of competition. In conclusion, the investment in the future needs to be undertaken by all the relevant entities in the Islamic financial sector - the industry, the regulators, the market participants, the academia and the international community. As a co-ordinated and concerted effort it will be mutually reinforcing in elevating the performance of Islamic finance. While the increasingly more competitive prevailing environment raises the pressures to produce immediate-term results, it is the investment in human capital and in research and development that will secure the long-term sustainability of the industry. It is these investments that will be the defining element of the future development of Islamic finance and its long-term success. BIS Review 47/2005  3