To repeat, inflation has been above the 2% target for most of the past five years. There are good reasons why policy wasn’t tightened in order to bring inflation back to target more quickly. But ultimately, the MPC will be judged by the success of our actions, not the elegance of our arguments. We need to demonstrate our commitment to bring inflation back to target and to keep it there. But we have also needed to trade off the speed with which we bring inflation back to target against the support that monetary policy can provide to the recovery. The MPC’s forward guidance gives greater clarity about our view of the appropriate trade-off. More important for us today, our guidance is rooted in the recognition that it’s a long way back to the economy being fully recovered. The damage and losses associated with the financial crisis and the years of frustration and disappointment that followed won’t be reversed simply by one or two quarters of strong growth. Our guidance makes clear that we intend to maintain the current exceptionally stimulative stance of monetary policy until we’ve  BIS central bankers’ speeches  5  seen a sustained period of strong growth and the margin of slack in the economy has narrowed significantly, as long as this does not pose risks to either price or financial stability. As you may know, our guidance was framed in terms of so-called thresholds and knockouts.
Australia is one example. Fluctuations in commodity prices entail changes in countries’ terms of trade, which measures the ratio of export to import prices. Changes in the terms of trade have an impact on the exchange rate, which in turn dampens the impact on profitability. The exchange rate acts as a buffer. In the 1990s, the  BIS Review 20/2002  1  fluctuations in Norway’s terms of trade were especially wide. Changes in oil prices were an important reason for this. The krone exchange rate has not fluctuated much compared with other countries. The Petroleum Fund acts as a buffer against fluctuations in the oil price, because the Fund’s capital is invested abroad. This contributes to stabilising the krone exchange rate. We must, nevertheless, be prepared for fluctuations in the krone that are more in line with the fluctuations observed in other countries. Changes in the global economy can affect the krone exchange rate. The exchange rate may also react to and contribute to curbing the effects of domestic disturbances. The floating exchange rate is by and large a well-suited instrument for absorbing unforeseen disturbances to the economy. A stronger krone may, for example, prevent demand pressures from translating into higher price inflation. As history and the experience of other countries have taught us, the real economic losses associated with eliminating high inflation and curbing inflation expectations are considerably higher than those associated with a variable nominal exchange rate.