time ; and ( ii ) that they could be very costly – they always lead to a loss of output and private savings, they carry heavy fiscal costs associated with public bailouts, and they could lead to a systemic loss of confidence in the financial system which is difficult to rebuild. examples covering both advanced and developing countries suggest that while financial crises differ as to their details, they always reflect the confluence of some underlying economic vulnerabilities and a specific crisis trigger. the underlying vulnerabilities could be any of a number of things : poor risk management by financial institutions ; mis - matches between assets and liabilities ; excessive leveraging of financial institutions, poor liquidity management or inadequate capital. the trigger could be anything, depending on the country – terms of trade shocks, the collapse of an asset ( housing ) bubble, or macro - economic setbacks resulting from exogenous shocks. sometimes the specific event that can trigger a crisis is unpredictable and crises themselves are also unpredictable. in fact, many triggers are exogenous and we can do very little about them. in these circumstances, our focus therefore should be on identifying and addressing underlying vulnerabilities early so as to reduce their incidence. recognition of this reality – the need to detect emerging problems has led to the development of early warning signals and more recently to the preparation of financial stability reports by central banks. some international financial institutions, have compiled a set of macro - prudential indicators to serve as barometers of the health and stability of the financial system and to provide early warning of potential problems. our monitoring system in the caribbean has been rudimentary at best, on non - existent and fragmented, in many of our regional jurisdictions. this is unfortunate since any robust analysis would have shown up a whole range of vulnerabilities in all of the financial institutions of the clf conglomerate. some of the more glaring vulnerabilities were : ( i ) a mis - match between assets and liabilities, with mostly short term liabilities paying above market interest rates, matched by long term assets ; ( ii ) excessive leveraging of balance sheet assets, reducing their net value ; ( iii ) a preponderance of inter - group transactions ; ( iv ) the total absence of a risk management framework ; and ( v ) inadequate capital. of course, these vulnerabilities were compounded by : ( i ) a weak legislative and regulatory infrastructure, in which clf, the parent holding company was not subject to

inflation target. this indicates that the market previously assumed that in the long term price inflation in norway would be on a par with that in the euro area, i. e. around the ecb ’ s objective of less than 2 per cent rate of increase in prices. the members of norges bank ’ s executive board are collectively responsible for the bank ’ s decisions. the executive board meets every three weeks. at every second meeting, the executive board discusses monetary policy in depth. decisions regarding changes in the interest rate will normally be made at these monetary policy meetings. the executive board discusses the economic outlook at a separate meeting three weeks before the inflation report is presented. on the basis of preliminary projections for the report, the executive board assesses the outlook for inflation two years ahead and the uncertainty surrounding these projections. the following day, the executive board summarises its discussions and assesses the consequences for monetary policy for the next four months. this assessment constitutes an important internal reference when the executive board later makes a decision regarding the interest rate. it will also provide the basis for our external communication through speeches and the media. growth forecasts have been revised downwards as a result of the interest rate increase in july. gdp growth will pick up, but will remain below the growth potential next year. the internationally exposed sectors of the economy are moving on a different path from some sheltered industries. whereas private consumption is buoying demand growth, scaling back is expected in the manufacturing industry. frictional unemployment is expected to rise. high real wage growth is resulting in divergent developments between private and public consumption. a large share of the growth in public spending will go to covering higher labour costs in the central and local government sector. as a result there will be little scope for increased activity in the public sector, and instead high growth in private consumption. a time horizon of two years for interest rate setting allows monetary policy to contribute to stabilising production. this horizon prevents monetary policy in itself from causing unnecessary fluctuations in the economy. as an alternative, we could have sought to achieve the inflation target of 2½ per cent using a time horizon of six months to one year. we would then have had to reduce the interest rate sharply this summer. this would have amplified the pressures in the norwegian economy that are so clearly reflected in wage developments and household demand for loans. in all likelihood, this would have required marked interest rate increases one to one and a half years ahead. strict inflation targeting of this type would thus have