A path that is in line with the projections in the previous Inflation Report (IR 1/04) provides a reasonable balance between the prospects for reaching the inflation target and stable developments in the real economy. The aim of monetary policy is higher inflation. It is appropriate to be particularly vigilant with regard to developments in consumer prices, but consumer prices may show random variations from one month to the next. Later this year, we will receive confirmation of whether consumer prices are rising in line with our projections. When inflation increases from a very low level, this will provide a basis for gradually moving towards a more normal short-term interest rate level in Norway. This may counter excessive credit growth and excessive pressures on domestic resources in the medium term. Interest rate developments in other countries may also have a considerable impact on the krone and hence on Norwegian interest rates. At its meeting on the 11 March, the Executive Board decided to reduce the interest rate by 0.25 percentage point. In reaching its decision, the Executive Board had weighed the objective of bringing inflation back to target and stabilising inflation expectations against the risk that output growth may eventually become too strong. Furthermore, according to the Executive Board’s assessment, with a sight deposit rate of 1.75 per cent at present, the probability that inflation two years ahead will be lower than 2½ per cent is greater than the probability that it will be higher. 6  BIS Review 16/2004

Rapid liquidity support at an early stage is critical to help pre-empting temporary liquidity difficulties in sound economies from escalating into a wider crisis. We call on the Fund to review its lending toolkit and emphasise that potential solutions should minimise stigma, and  BIS central bankers’ speeches  1  send effective signals that differentiate crisis bystanders as fundamentally sound economies. A study of gaps and new solutions can be undertaken together with an early review of the Flexible Credit Line and Precautionary Credit Line. The latter should be aimed at improving the accessibility and flexibility of these instruments whilst limiting moral hazard. ii) Surveillance The Fund’s credentials on surveillance suffered a setback after it had not given sufficient warning in the run-up to the 2008/9 crisis. The 2011 Triennial Surveillance Review (TSR) is therefore a good opportunity for the Fund to address the shortcomings. On the whole, we welcome the key TSR objective of making the Fund’s surveillance as interconnected as the global economy itself. Given its universal membership, cross-country experience and deep technical expertise, the Fund is uniquely placed to identify global challenges and facilitate dialogue with country authorities to undertake appropriate policy responses. To leverage on this strength, the Fund needs to invest time to build stronger trust and consensus amongst members on its surveillance and analytical frameworks. The Fund is also well placed to integrate its macroeconomic and financial surveillance, and thus to identify latent vulnerabilities, interconnections and transmission channels.