Variables such as inflation expectations, wages, output, unemployment, the exchange rate, commodity prices, and so on, have important effects on inflationary forecasts and must be taken into account when deciding the future path of monetary policy. However, it is also important that investors, wage and price setters understand and share the importance of these variables for the inflation process. Communication is essential, and that is the role of Monetary Policy or Inflation Reports, monetary policy statements, minutes, projections, speeches, and so forth. A key question during the financial crisis was to which extent central banks should react to asset prices, such as housing or stocks prices. The answer from the perspective of inflation target should be: as long as they affect the forecast of inflation, they should be considered in the reaction function of monetary policy. Asset price bubbles or distortions that may threaten financial stability should be considered when evaluating financial vulnerabilities, but not influence monetary policy if they do not have an impact on inflation. It is not clear that an increase in interest rates will be capable of stopping an increase in asset prices. The required adjustments might be so large that they could end up unnecessarily generating high unemployment and an undesired drop in inflation. Under inflation targeting, any interest rate movements that is inconsistent with inflation converging to the target may undermine the credibility of monetary policy, destabilizing inflationary expectations and weakening the effectiveness of monetary policy.
Passporting rights have been well availed of in this sector, too, and the total number of Notifications for European Insurance Undertakings to carry on business in Malta under the Freedom to Provide Services directive now stands at 204. The other reflection I would like to share with you is inspired by an interview given recently by the CEO of Mediterranean Bank to a local economic magazine, in which Malta was referred to as ‘a secure EU jurisdiction’. In this same context it was stated that ‘Malta’s stability is an important part of its appeal as a banking location’. While such accolades are indeed welcome, they do not come entirely as a surprise. For when Malta’s financial legislation was overhauled in 1994, and when EU legislation was later transposed in anticipation of EU membership, an intended by-product was indeed the incorporation of the highest international standards and best practices into Maltese financial laws and regulations. This was accompanied by a strengthening of the institutional framework for the regulation and oversight of the financial system. In 2002 the Malta Financial Services Authority (MFSA) became the single regulator for financial services when it took over the responsibility for the banking sector from  BIS Review 92/2006  1  the Central Bank of Malta (CBM). The Bank then assumed responsibility for ensuring the stability of the entire financial system. A year later Malta volunteered to undergo a Financial Sector Assessment Programme (FSAP) by the IMF and the World Bank.