In the US, there are now expectations that the rate tightening cycle is nearing an end, and that the policy rate will be lowered in the course of next summer. A rise in key rates is expected over the next year in the euro area, Sweden, the UK, Australia, Japan and Switzerland. In the June Inflation Report, Norges Bank assumes that money market rates among our trading partners will gradually increase over the next three years. The path for domestic and external interest rates does not imply considerable changes in the krone exchange rate. Since the first quarter of 2004, the import-weighted krone exchange rate (I-44) has shown a rising trend, albeit with some degree of fluctuation. Since end-May this year, the krone has depreciated from strong values. So far in the third quarter, the krone exchange rate has been about 3 per cent weaker than projected in the June Inflation Report. 4  BIS Review 92/2006  Monetary policy assessments and strategy According to the monetary policy strategy in Inflation Report 2/06, the sight deposit rate should be in the interval 2¾ - 3¾ per cent in the period to the publication of the next Inflation Report on 1 November, conditional on economic developments that are broadly in line with projections. The analyses in Inflation Report 2/06 were based on a gradual increase in the interest rate towards a more normal level. In the first six months of 2006, the key rate was increased in two increments of 0.25 percentage point.
However, over time as the financial system get more complicated and expanded exponentially, its supervision and regulation has been partially transferred to other institutions, which is also the case in Turkey. The challenge faced by central banks is to establish a framework that combines both price stability and financial stability as primary mandates even at times they conflict with each other and identify the policy instruments to target both. As you know central banks have typically used short-term interest rates as their primary policy instrument. However, the “Tinbergen Rule” suggests that this one instrument could be deployed to achieve only one target, which is conventionally recognized as price stability. Addressing both price stability and financial stability simultaneously necessitates a second set of policy tools. This second instrument may be in the form of the supervision and regulation of financial activities. The question is that whether these responsibilities should be assumed solely by central banks. The downside of this option is that central banks may turn out to be too big, inflexible and in conflict with themselves, which eventually led to failure in both objectives. Dear Participants, Prior to the global financial crisis, central banks were conducting monetary policy through conventional banks and use government bonds in open market operations. However the  BIS Review 73/2010  3  financial crisis led central banks employ a wider range of securities, ranging from corporate bonds to asset backed securities and mortgages. The reason behind this transformation was obvious.