##vektsvalutakurs for norge ” ( real equilibrium exchange rate for norway ), in norsk økonomisk tidsskrift 118, pp 89 - 112. given the assumptions underlying the projections in the last inflation report, inflation will be considerably lower than the inflation target in the period to the summer of 2006. monetary policy also places emphasis on avoiding imbalances in the real economy. capacity utilisation in the economy is rising, but the output gap, as it is measured by norges bank, will only be marginally positive during the period. our assessment is that monetary policy should be aimed at increasing inflation at a somewhat faster pace than projected in the last inflation report. in connection with the monetary policy meeting on 11 august, the executive board stated that the inflation outlook may imply an unchanged interest rate for a longer period than implied by the interest rate assumptions in the last inflation report. on the other hand, the prospect of continued low inflation in norway implies that norway should not be the frontrunner when interest rates are increased in other countries. following the monetary policy meeting on 11 august, the executive board stated that with the prospect of continued low inflation for a period ahead, wide deviations from projected economic developments would be required before the interest rate should be increased. the executive board also stated that uncertainty concerning the effects of previous monetary policy easing and the unusually low interest rate imply, on the other hand, that we should exercise caution with regard to further interest rate reductions.

and stable output and employment and to counteracting the build - up of financial imbalances. norges bank sets the key policy rate with a view to stabilising inflation at the target in the medium term. the horizon will depend on the disturbances to which the economy is exposed and the effects on the outlook for inflation and for output and employment. large and sudden outflows of capital are a potential source of instability for small, open economies. large exchange rate movements have at times been a source of instability. in norway, the household, banking and corporate sectors as a whole take on currency risk to a limited extent. furthermore, government finances are solid, and fiscal policy is not affected to any great extent by short - term exchange rate movements. this allows the exchange rate to play an important role in absorbing shocks to the economy. we have thus been able to reap the benefits of an efficient international capital market without having to deal with its challenges. 1 / 3 bis central bankers'speeches at the same time, in a world of high capital mobility and extensive trade, monetary policy ’ s room for manoeuvre is constrained by the exchange rate channel. in a small open economy with a floating exchange rate, the domestic interest rate can differ from interest rates abroad. however, an interest rate differential that becomes too wide can lead to considerable exchange rate volatility, which will in turn feed through to inflation, output and employment. thus, the domestic interest rate cannot be set without regard to the level of external interest rates. the room for manoeuvre in monetary policy is further constrained in periods when external interest rates are close to or below zero. although the financial crisis in 2008 had a marked impact on norway, our economy was affected to a lesser extent than most other advanced economies. there are a number of reasons for this. the norwegian economy was in an upturn when the crisis hit. commodity prices fell, but soon rebounded. norwegian banks were not directly exposed to loss - making financial instruments backed by subprime us housing mortgages. the banks suffered for a short period when international liquidity dried up, but these problems were resolved. in addition, substantial fiscal leeway enabled policy to respond forcefully, allied with a slashing of interest rates, from 5. 75 percent in september 2008 to 1. 25 percent in june 2009. the economy recovered rather quickly, and we did not need to resort to quantitative easing or interventions in the foreign exchange market. when the oil