Nevertheless, developments in the krone are of considerable importance to interest-rate setting because exchange rate developments have an impact on inflation and output. When there are prospects of moderate economic activity, low wage growth and low inflation, Norges Bank will reduce the interest rate. This will normally result in a depreciation of the krone. Prices for imported goods and services will increase. A weaker krone strengthens the competitiveness of Norwegian enterprises and indirectly leads to higher output, employment and inflation. 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. In the autumn of 2002, the Norwegian krone was probably also perceived as a safe haven. Wide fluctuations between major currencies have a tendency to result in a weaker krone. In the past 12-18 months, developments in the interest rate differential between Norway and other countries appear to have had a particularly marked impact on our currency. Norwegian interest rates have been pushed down to the level prevailing abroad. Chart 10.
Even in countries in which the governments and the central banks have clearly switched to a policy directed at achieving price stability, concern about a recurrence may persist. Such a concern is not without costs to the economy. Households and businesses will reckon that there is a risk of an increase in inflation. Consequently the interest rate level may be higher and economic development in general may be worse than what would have been possible if all the actors in the economy had had complete confidence in the anti-inflation policy. Question 3: Why should central banks be independent? This problem of building confidence in the anti-inflation policy may explain why in recent years many western countries have changed their legislation or in other ways have made their central banks more independent. There are basically two problems: the temptation to resort to stimulating the economy in the short term may be too strong and inflation expectations become built into the system and make the policy less effective. By giving the central bank an independent status, the political decision-makers can demonstrate that they are serious about their ambition to let monetary policy be conducted with a view to long-term goals. In such a way price stability can be combined with better economic development. BIS Review 14/1998  -5-  There have been a good many studies showing that an independent position for the central bank tends to have a favourable impact on inflation.