A declaration is also made stating that inflation will be kept within certain limits over a specific period. The central bank is granted independence to attain this target with the instruments at its disposal. Other aspects of the new framework include increased transparency in monetary policy and communication of information from the central bank to the public and government. In most countries this has greatly stimulated discussion of monetary policy and central bank measures, on which opinion is divided as ever. Inflation forecasts play a vital role in monetary policy implementation under such a system. The expected inflation trend according to the forecast forms the basis for monetary policy decisions. One consequence of this policy is that exchange rate stability is no longer the anchor of monetary policy. This is not because the exchange rate of any currency is a lightweight factor in economic developments; rather, experience has shown that under free international capital flows, central bank instruments are inadequate for maintaining a stable exchange rate. Under conditions of free international capital flows, a central bank’s primary instrument is interest rates, which in the long run can only attain a single macroeconomic goal, i.e. ensuring price stability. It has turned out that other countries have benefited from adopting such a framework. It was in light of this international experience that the Central Bank of Iceland’s monetary policy framework was changed two years ago and formal inflation targeting was adopted.
In 2003 it was able to raise its profits substantially in spite of a mixed macroeconomic and financial environment. Thanks to these profits, banks were able to bolster their capital significantly, thus enhancing their capacity to absorb shocks. The resulting capital ratios in the banking sector are high both in historical terms and by international standards. This impression of pronounced robustness in the Swiss banking sector is corroborated by the relatively low level (in historical terms) of the stress indicator. This is a new indicator calculated as a synthesis of different stress symptoms. The indicator considers in particular the capital ratios, profits, share prices and risk premiums on bonds in the Swiss banking sector. As far as the outlook is concerned, we believe that the macroeconomic environment and the financial markets do not present any significant threat to the stability of the Swiss banking system. The forecasts for 2004 point to a rebound in economic growth in Switzerland and the European Union along with a continuing upswing in the United States. Moreover, the rise in prices on the Swiss real estate market has remained moderate by both historical and international standards. It is thus unlikely that this market will see any abrupt downward adjustment - traditionally a major stress factor for the banking sector. And finally, the available indicators suggest that the major global banking sectors are  BIS Review 39/2004  1  also relatively robust. At present, therefore, the risk of contagion - i.e. of a crisis having repercussions on Switzerland - is remote.