It naturally follows that the objectives set out in the first paragraph of the objects clause are primary objectives for the Bank and fully in line with the principles on which the Bank already bases its activities. 1/8  BIS central bankers' speeches  Trust in the stability of the value of money is the very foundation of the monetary system. In addition, households and businesses must be confident that the payment system will allow them to conduct transactions securely at all times. An efficient and stable interbank payment and settlement system also provides a necessary basis for the stability of the financial system. With financial system stability, investors can channel available capital to investments offering the highest return. Norges Bank also has a key role in the management of crises in the financial system. In a crisis, the Bank can supply liquidity both to influence market interest rates and to stabilise the financial system. Flexible inflation targeting The purpose of “maintaining monetary stability” sets a long-term objective for monetary policy. The day-to-day conduct of monetary policy requires a more operational target. Most countries set this target in the form of a regulation or a more time-limited mandate issued by the government. The operational target is set to meet the primary objective, but is also a means of holding the central bank accountable. Chart: Emergence of inflation targeting The objective of monetary stability is compatible with a range of operational targets.
Furthermore, government finances are solid and are not affected to any great extent by shortterm exchange rate movements, allowing the exchange rate to play an important role in absorbing shocks to the economy. Particularly in periods of falling oil prices, a weaker krone has had a stabilising effect on the business cycle. With confidence in the inflation target, monetary policy has been able to underpin such movements. At the same time, in a world of high capital mobility and extensive trade, monetary policy’s room for manoeuvre is constrained by the exchange rate channel. In a small open economy with a floating exchange rate, the domestic interest rate can differ from interest rates abroad. However, an interest rate differential that becomes too wide can lead to considerable exchange rate volatility, which will in turn feed through to inflation, output and employment. Thus, the domestic interest rate cannot be set without regard to the level of external interest rates. The room for 2/8  BIS central bankers' speeches  manoeuvre in monetary policy is further constrained in periods when external interest rates are close to or below zero. Under an inflation-targeting regime, a numerical target is set for the inflation rate, either in the form of a point target or a target range. In its conduct of monetary policy, the central bank aims to keep inflation close to the point target or the midpoint of the target range over time. Inflation can impose costs on society if it is too high and if it is too low.