policy may become somewhat more robust. 1 key policy rate a monetary policy that only takes into account the consideration of bringing inflation rapidly back to target ( criterion 1 ) would imply that the interest rate should rapidly have been reduced to below 1 per cent when we presented the latest monetary policy report. in that case, the interest rate would have had to be raised rapidly again to prevent activity and inflation from becoming too high further ahead. such a strategy could be consistent with the desire to safeguard against inflation expectations becoming entrenched below the inflation target, but could on the other hand have a substantial impact on output and employment. developments become more stable if weight is also given to stabilising output ( criteria 1 and 2 ). this would also imply an interest rate reduction first and then an interest rate increase further ahead. giving weight to output implies that inflation is brought back to target somewhat later. the consideration of a steady interest rate course suggests that small, temporary disturbances should normally not result in abrupt shifts in the interest rate. if this consideration is also given weight in interest rate setting ( criteria 1, 2 and 3 ), the impact on the interest rate will be smaller. if we also give some weight to the interest rate given by a simple monetary policy rule – the taylor interest rate rule ( criteria 1, 2, 3 and 4 ), the key policy rate will remain at today ’ s level for a period and then be raised gradually. this results in a further small downward shift in the projections for inflation and the output gap and is consistent with the projections in the previous monetary policy report. the projections for inflation and economic activity vary from one report to the next. hence interest rate prospects will also change. in our reports we attempt to illustrate which factors have influenced the changes in the interest rate forecast through their effects on the prospects for inflation, output and employment. a simple rule can function well under alternative models for the economy. the type of uncertainty we want to be robust to will determine what the best rule will be. change in interest rate forecast over time the interest rate forecast is an expression of a balance between various monetary policy considerations and a response pattern that households, firms and financial institutions can build on. the interest rate forecast is based on our understanding of the functioning of the economy. the uncertainty surrounding the interest rate forecast is highlighted in our fan charts with uncertainty intervals around the interest rate forecasts. the forecasts have shifted considerably over time. this reflects that the interest rate is an instrument that should react to

how can the conduct of monetary policy, which has such far - reaching consequences for so many, be delegated in a democratic country? how is one to ensure that decisions are in line with the interests of society? these questions become more relevant, the more room there is for judgement in interest rate setting. when the operational objective was a fixed exchange rate, the room for judgment was very limited. norges bank ’ s task was to maintain a fixed krone exchange rate. monetary policy was more or less on “ autopilot ”. in a narrow sense, this was a very open policy. the public could at all times observe the krone exchange rate and monitor that the bank was performing its duty. many of you perhaps remember the era when a dollar cost 7 kroner and 14 øre. 15 on the basis of purely democratic considerations, there was little need for transparency about the assessments underlying the use of instruments. the exchange rate was fixed, but occasionally the target value was adjusted. at those times the cards were held close to the breast. on occasion it was even necessary to break the eighth commandment ( that is to lie ). around the end of 1986, journalists in the newspaper nordlys were asked to take a retrospective look at the past year. one of them recalled an interview with the state secretary of the ministry of finance, bjørn skogstad aamo. in the interview skogstad aamo flatly denied rumours of a krone devaluation. but before the interview was printed, the news agency ntb reported that the krone had been devalued by 12 per cent. 16 perhaps the journalist was disappointed but skogstad aamo was not criticised for breaking the eighth commandment. over the last decade, the objective of monetary policy has not been a fixed krone exchange rate, but price stability through low and stable inflation. 17 according to the monetary policy regulation the objective is inflation of close to 2. 5 per cent over time. but how long is over time? and what is close to 2. 5 per cent? with these formulations, it is no longer that easy to evaluate monetary policy. there are several reasons for this. first, it takes up to one to two years for a change in the interest rate to feed through to inflation. second, inflation is not only influenced by the interest rate. for example, precipitation levels can have a strong impact on electricity prices. third, we set interest rates also with