Regional central banks and major institutional investors are aware of such limitations; hence the best way forward is to complement rating-embedded investment guidelines with a more robust and rigorous internal credit risk evaluation framework. In tandem with diversification into alternative asset classes, there is a growing emphasis to improve the sophistication of risk modelling, taking into account how risk can be initially understated when herding behaviour dominates, but rears its ugly head during reversals. iv)  The growing importance of Islamic finance  As events unfolded in the midst of the financial crisis, the sustained expansion of global growth and development in Islamic finance has emerged as one of the most prominent trends in global financial landscape. The industry continues to draw significant interests from all corners of the world. The global financial crisis underscores the potential role and relevance of Islamic finance as a viable approach in investing. Due to the Shariah prohibition of excessive leverage and unproductive cash hoarding, Shariah-compliant funds have outperformed their conventional peers since the onset of the crisis. As a result, there has been greater appreciation of the principles of Islamic finance, as evidenced by the expansion of interest and demand for Islamic financial products on a global scale. In line with the rapid growth of Islamic finance, emphasis has been placed on the development of the international financial infrastructure such as setting prudential standards and international best practices, a role spearheaded by the Islamic Financial Services Board.

Forecasts of inflation, output, the interest rate and other variables are based on an assessment of the current situation and a perception of how the economy functions. Disturbances to the economy may result in changes in the forecasts. Data revisions imply that the current economic situation is not fully known. Our ambition must be to reduce uncertainty with regard to our own response pattern. That actual interest rate developments will deviate somewhat from Norges Bank's forecast will probably be the rule rather than the exception. Overall, inflation measured by the CPI-ATE is projected to pick up gradually over the next three years towards 2.5%. Developments since June have resulted in somewhat lower inflation than expected, and we must take this into account when drawing up the next Inflation Report. Looking ahead, labour shortages are expected to push up wage growth this year and next. Pressures in the economy are expected to continue to build up before receding towards a normal level. The forecasts are uncertain and we also attempt to shed light on this. The figure illustrates the uncertainty surrounding the forecasts. The wider the fan chart is, the more uncertain the forecast. The uncertainty implies that the interest rate should normally be changed gradually, so that we can assess the effects of interest rate changes and other new information about economic developments. Changes in forecasts are nothing new to financial market participants, who frequently change their expectations concerning future interest rates as the economy is exposed to disturbances.