It doesn't really
mean anything in particular (it's just another IP in the 127.0.0.0/8 block).
The reason it's used as the IP for your hostname is explained in
Section 10.4 of the Debian Reference Manual.
Quote:
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Some software (e.g., GNOME) expects the system hostname to be resolvable to an IP address with a canonical fully qualified domain name. This is really improper because system hostnames and domain names are two very different things; but there you have it. In order to support that software, it is necessary to ensure that the system hostname can be resolved. Most often this is done by putting a line in /etc/hosts containing some IP address and the system hostname. If your system has a permanent IP address then use that; otherwise use the address 127.0.1.1.
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