function. however, a financial stability mandate is more complicated. it generally involves government, particularly when public funds are involved, in crisis resolution and the policy tools are more directed at particular sectors, and therefore may be more politically sensitive as the distributional impacts are more apparent than in the case of monetary policy. furthermore, challenges for communications are likely to arise if interest rates are used for both monetary policy and financial stability purposes. and, as a recent imf paper has argued, financial stability is difficult to measure but crises are evident, so policy failures are observable, unlike successes. to quote from the paper, “ central banks would find it difficult, ( even ex post ) to defend potentially unpopular measures, precisely because they succeeded in maintaining financial stability. ” and any perceived failures on the financial stability front have the potential to undermine monetary policy independence through a general loss of credibility of the central bank. bis central bankers ’ speeches a final issue is the debate around the optimal level of inflation. in particular, is the 2 per cent inflation target norm in advanced economies too low? olivier blanchard at the imf mooted this in 2010, but the idea persists, and was recently raised again by paul krugman. the argument relates to a fear of deflation, the dangers of a low inflation trap, and the economic costs of deflation. but it does not undermine the basic tenet that long run price stability remains at the core of central bank mandates. rather, it appears to be a call for a moderate upward adjustment to what would be regarded as the advanced economy norm for price stability. this debate, however, is not really that relevant in south africa or many emerging market economies where structural features, price setting behaviour and vulnerability to exogenous shocks has generally required higher inflation targets. these structural features include factors such as the weight of administered prices in the inflation basket, the weight of volatile elements such as food, vulnerability to terms of trade changes, particularly in the case of commodity producers, and the impact of exchange rate volatility on the exchange rate. although our inflation target of between 3 and 6 per cent is higher than the advanced economy norm, this does not mean that there have not been times when there have been calls to raise the inflation target, even from the current high level, in order to bring about a looser monetary policy stance. our current level of inflation and our target are not close to the low inflation trap, and our view is that a higher inflation target would

achieving an inflation rate of 2½ per cent two years ahead. norges bank ’ s views on the inflation outlook are presented three times a year in the inflation report. our projection for inflation in the period ahead is presented as well as our assessment of the balance of risks surrounding this projection. the executive board ’ s updated assessments are presented in connection with the monetary policy meetings every six weeks. immediately after each meeting, the bank issues a press release and holds a press conference. the key interest rate is set on the basis of an overall assessment of the inflation outlook two years ahead. our inflation projections and our views on the balance of risks associated with these projections provide a summary of these assessments. norges bank ’ s inflation projection is our assessment of the most probable outcome of the rise in cpi two years ahead. in setting interest rates we also place emphasis on the probability distribution – or the balance of risks – surrounding the projection. therefore, we also publish our judgement of the risk associated with our own projections. the phasing in of petroleum revenues has to be counteracted by a tighter monetary policy than would otherwise be the case. this may be accomplished through an adjustment of the interest rate, an appreciation of the krone or both. small countries have experienced fairly wide exchange rate fluctuations. the swedish krona has depreciated by more than 10 per cent since summer 2000. the australian dollar has weakened by over 30 per cent since spring 1997. the uk, canada and new zealand have also experienced wide exchange rate fluctuations. the norwegian krone, on the other hand, has been relatively stable. a monetary policy that is oriented towards low and stable inflation will contribute to stabilising aggregate demand and output. as a result, the central government budget will not normally have to be used actively to stabilise the economy. an increase in unemployment that is due to a higher rate of increase in labour costs than implied by productivity growth cannot be offset by low interest rates or higher public spending and tax cuts, but requires changes in the functioning of the labour market. the planned use of petroleum revenues implies that the sheltered sector will lay claim to a larger share of the labour force. this will probably cause a decline in manufacturing employment. the ensuing deterioration in competitiveness may lead to restructuring. in the long run, monetary policy cannot influence overall employment or its distribution across industries. norway ’ s terms of trade flucture widely. this is largely attributable to variations in the oil price. however,