In the last Inflation Report, it was the Executive Board’s assessment that the projections conditional on the market’s interest rate expectations seemed to provide a reasonable balance between the objective of bringing up inflation, while avoiding excessive growth in output and employment. The previous Inflation Report, from July 2004, stated that “the most appropriate alternative now seems to be that the interest rate should be kept unchanged for a longer period than indicated by market expectations.” After this, we saw that interest rate expectations fell. By communicating our view concerning interest rate expectations, Norges Bank seeks to influence interest rate expectations. The objective is for interest rate expectations to be consistent with economic developments where inflation is on target over time and output is stable around its potential level. Most often, however, there will be a number of ways to achieve this. We need some references that provide some indication of whether a given interest rate path is reasonable. It is natural to turn first to monetary policy theory. In the theoretical literature, the trade-off between price stability and stability in the real economy is often described as a problem of minimisation, where the central bank wants to minimise a loss function, which includes variations in output and variations in inflation. The central bank shall then choose the path for the interest rate ahead that minimises the expected discounted “losses” in all future periods. In practice, no inflation-targeting central bank uses a loss function of this kind directly.

The establishment of the Islamic Financial Services Board (IFSB) in 2002 to set the prudential standards for Islamic finance, and the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) established in 1990 has been key to ensuring the soundness and stability of the Islamic financial system. The IFSB and AAOIFI have had an important role in the harmonisation of prudential and accounting standards across the different jurisdictions. They are also instrumental in instituting international best practices in the global development of Islamic finance. The Islamic financial institutions are also subject to the requirements on anti-money laundering and anti-terrorist financing. Opportunities through greater international financial integration The globalisation of Islamic finance has gained significant momentum in this recent five years. While the early development of Islamic finance was domestic centric, its internationalisation is now manifested by increased cross border flows, greater participation in international Islamic financial markets, the increased presence of financial institutions in new jurisdictions and more recently, the increased number of Islamic financial institutions which have shareholders from multiple jurisdictions. Greater financial integration has essentially been facilitated by the more rapid pace of liberalisation that has been supported by the progress that has been achieved in the development of the international Islamic financial infrastructure. This trend has also been prompted by the need for greater diversification of risks in the management of funds. In the current international financial environment, this trend has become more pronounced prompting investors to consider other asset classes and markets that provide stability.