targeting regime is flexible. by taking account of the deviation in the nominal interest rate from a normal level when setting the key policy rate, norges bank seeks to counter the build - up of financial imbalances that may disturb activity and inflation further ahead. this does not mean that the level of the key policy rate is an independent objective of monetary policy. rather, the purpose is to overcome weaknesses in our analytical tools in order to cope with the possible build - up of financial imbalances resulting from keeping interest rates low over time. bis central bankers ’ speeches chart 12 at our most recent interest rate meeting the key policy rate was reduced by 0. 25 percentage points to 1. 50 percent. in its assessment the executive board stated that : “... weak growth prospects abroad and the strong krone are contributing to keeping inflation low and dampening economic growth in norway (... ). if the interest rate is set too high, the krone may appreciate further, inflation may continue to fall and growth in output and employment may become too low. this suggests that the key policy rate should be reduced further. on the other hand, there is virtually normal capacity utilisation in the norwegian economy. moreover, low interest rates over time may induce households and enterprises to take excessive risks and accumulate excessive debt. ” after a decade of learning, inflation targeting has become more flexible. the current outlook suggests that it will likely take several years before inflation is back on target. however, the inflation target has to be reached over time, otherwise our credibility is put at risk. flexibility is good to have, and easy to lose. in assessing various considerations, monetary policy must be geared to meet its primary objective of low and stable inflation. there are limits as to how many goals monetary policy can meet. other instruments must be used to attain other objectives. to ensure that new or further financial imbalances do not build up, we also need a tighter overarching international policy framework to address the stability of the financial system as a whole. a macroprudential policy framework should be part of this new framework. macroprudential policy framework financial market participants can trigger self - reinforcing economic fluctuations. individual banks and investors do not necessarily take into account the overall risk in the financial system. the consequences became clear during the financial crisis : banks had inadequate equity capital, relied excessively on short - term wholesale funding and had insufficient buffers bis central bankers ’ speeches of liquid assets. the new

market may at times have a tendency to underestimate this stabilisation mechanism. the increase in oil prices has increased the need for allocations to the government petroleum fund, and in july norges bank resumed its daily purchases of foreign exchange for the petroleum fund. this comes in addition to the regular transfers of profit from the state ’ s direct financial interest in petroleum activities ( sdfi ) to the petroleum fund, which are to be invested abroad. higher oil prices mean higher revenues for the oil companies. international and norwegian oil companies with activities in norway increase their capital outflows when profits increase. thus, in the short and medium term, cumulative profits in the petroleum sector do not generate substantial krone holdings in the domestic economy. it is possible to define a “ basic balance ” 3 in the external account that is found by subtracting the capital outflows from the petroleum fund from the current account balance. the basic balance is not affected by fluctuations in oil prices and the currently high price level when the central government ’ s use of petroleum revenues follows a long - term guideline, but it is weakened by the increase in imports. when the monthly allocations to the petroleum fund are larger than the foreign exchange transfers from petoro ( sdfi ), norges bank will purchase foreign exchange in the market to cover the difference. the ministry of finance determines the amount of the monthly transfers to the petroleum fund on the basis of its estimates in the national budgets and the revised national budgets. the ministry may also adjust the amount on the basis of new information concerning, for example, developments in oil prices. given the current high level of oil prices, purchases in the next few months will probably be considerably larger than they have been during the summer. norges bank has not defined a target for the exchange rate. nevertheless, developments in the krone are of considerable importance to interest - rate setting because the exchange rate influences inflation and output. portfolio investments may easily dominate movements in the krone exchange rate in the short term. themes in foreign exchange markets shift. in periods, investor focus on stock returns feeds through to exchange rate movements. during periods of political and economic unrest, investors may choose individual currencies as a safe haven - often the swiss franc. the norwegian krone was probably also perceived as a safe haven when oil prices rose in the autumn of 2002 as a result of the uncertainty concerning a possible war in iraq. in the period from march to may 2003 and throughout the autumn,