Rather, the purpose is to overcome weaknesses in our analytical tools related to the possible buildup of financial imbalances resulting from keeping interest rates low over time. Monetary policy will continue to react to shocks that affect the medium term path for inflation, output and employment. After a decade of learning, inflation targeting has become more flexible. Flexibility is good to have, and easy to lose. The inflation target has to be reached over time, otherwise our credibility is put at risk. In assessing various considerations, monetary policy must be geared to meeting its primary objective of low and stable inflation. There are limits as to how many goals monetary policy can meet. Other instruments must be used to attain other objectives. To ensure that new or further financial imbalances do not build up we also need a tighter international overarching policy framework to address the stability of the financial system as a whole. A macroprudential policy framework should be part of this new framework. Macroprudential policy framework Financial market participants can trigger self-reinforcing economic fluctuations. Individual banks and investors do not necessarily take into account the overall risk in the financial system. The consequences became clear during the financial crisis: banks had inadequate equity capital, relied excessively on short-term wholesale funding and had insufficient buffers of liquid assets. 2  BIS central bankers’ speeches  The new international regulatory framework is intended to remedy this situation.
21  NOU (Official Norwegian Report) 1999: 27 “Ytringsfrihed bør finde Sted (There shall be freedom of expression)”. Sejersted was awarded the Ossietzky Prize for his contribution to freedom of expression in 2008. 22  In the Norges Bank Act of 1985, Norges Bank is required to “inform the public of the assessments on which monetary policy decisions are based”. In October 2009, a new government communications policy was laid down by the Ministry of Government Administration and Reform, promoting transparency as an important principle of good communication. The government’s communication is required to be open, clear and accessible. The government is also required to ensure that relevant information reaches the relevant parties and that the information is adapted to the relevant target groups. BIS Review 140/2009  5  Modern economic theory argues in favour of transparency I mentioned that the previous view was that monetary policy operated by surprising economic agents, while the prevailing view is that it works best by being predictable. According to modern economic theory, economic decisions are heavily influenced by expectations. 23 This has also become an important economic policy recognition. Today’s key rate is important, but even more important is the expected key interest rate ahead. When the owner of a firm takes up a loan to build a new factory, the expected interest rate over the life of the loan is taken into account.