Svein Gjedrem: Economic perspectives
Annual address by Mr Svein Gjedrem, Governor of Norges Bank (Central Bank of Norway), at the
meeting of the Supervisory Council of Norges Bank, Oslo, 19 February 2004.
* * *
Introduction
There is now growth in the Norwegian economy. Oil prices are high. Capacity utilisation in the
mainland economy is at the level prevailing in the mid-1990s. Wage growth is slowing. White-collar
workers have lowered their wage demands, and there are prospects of a moderate main settlement
this spring - the first in eight years. The value of the krone is on a par with the mid-1990 level. The
interest rate level is in line with the level among our trading partners.
In that respect, there is equilibrium in the Norwegian economy at present.
But it is fragile.
The international division of labour is shifting, and when faced with major changes it is a disadvantage
for Norwegian business and industry that costs are high.
Inflation is very low.
Short-term interest rates abroad have been unusually low over the past 21⁄2 years, and there are no
prospects of a considerable increase in the near term even if the world economy is expanding. Last
year, interest rates abroad acted as a magnet on Norwegian interest rates. We now have the lowest
nominal interest rate level recorded in decades.
Norwegian households are optimistic and are borrowing and investing in housing and property.
This stands in contrast to corporate behaviour. Businesses are rationalising and earnings are on the
rise, but they are still investing and borrowing on a limited scale.
The upturn is still not entirely self-sustained.
A global financial market
Chart 1. Long-term interest rates
Per cent
15 15
12 12
9 9
6 6
3 3
Norway US Germany
0 0
1983 1986 1989 1992 1995 1998 2001 2004
Source: EcoWin
Cross-border capital flows have increased considerably in recent decades. Bond markets have moved
more in tandem, particularly since the mid-1990s. This also applies to equity markets.
Investors are increasingly spreading their investments across countries. They are diversifying risk, and
seeking high returns. In parallel, governments, banks and companies are issuing more debt externally.
Chart 2. Global daily foreign exchange trade
In billions of USD
1600
1200
800
400
0
1983 1989 1992 1995 1998 2001
Sources: BIS, IMF, central banks
Currency trading has increased markedly since the 1980s. This trend was reversed when the number
of currencies was reduced owing to the introduction of the euro. Large trading volumes enhance
market liquidity. The growth in currency trading is ascribable to an increase in portfolio investment,
higher foreign direct investment and growth in world trade.
The forward exchange and options market have expanded in recent years. A deeper market reduces
transaction costs, and it is easier to find counterparties. This has provided companies with greater
scope for hedging against foreign exchange risk. The use of instruments that reduce the risk
associated with a floating krone is also increasing in Norway.
A considerably larger portion of credit in other countries is now channelled via the bond market. Less
risk is being accumulated in banking systems. The development of new markets and instruments, for
example credit derivatives, has also led to a broader risk spread than earlier.
The improved diversification of risk is probably one of the reasons that world financial markets have
coped with the stock market decline and the accounting scandals with limited damage to the wider
economy. This is probably one reason why the downturn following the stock market decline in 2000
was considerably less pronounced than earlier downturns.
The new instruments spread risk, but do not eliminate it. Financial markets have become highly
complex. This alone entails an operational risk, which is a challenge to participants and the
supervisory authorities.
A shift in the international division of labour
Increased trade promotes growth and lays a basis for prosperity. A number of Asian countries have
experienced strong, export-led growth - Japan from the 1950s and several countries in Southeast Asia
from the 1960s.
Chart 3. Share of global exports
Per cent
16 16
US
12 12
Germany
8 8
Japan
4 4
China
0 0
1983 1987 1991 1995 1999 2003
Sources: IMF, EcoWin and Norges Bank
In recent years, China has become an important player in international trade, and the country is now
the world's fourth largest trade nation. The Asian economies and the rest of the world have become
more integrated.
Technological advances and a sharp fall in prices in the IT and telecommunications sectors have
exposed a number of services that were previously sheltered to competition from low-cost countries.
Indian companies service three million customer telephones for companies in the US and the UK -
daily. European airlines are transferring ticket settlement to India. US companies are outsourcing
accounting services to India. Analytical activity in investment banks and development divisions in ITC
companies are also being moved to India. Norwegian engineering companies are buying cheap
engineering services in India and China.
EU enlargement this spring, with ten new members, is also influencing the division of labour in Europe.
Chart 4. Wage level
Percentage of wages in the US
50 50
South Korea
40 40
Taiwan
30 30
Singapore
20 20
Hong Kong
10 10
0 0
1980 1985 1990 1995 2000 2002
Sources: US Department of Labor and Norges Bank
The advances in Asian economies have generally relied on an abundant supply of cheap labour, but
wages have gradually increased in step with productivity gains. A higher income level paves the way
for higher imports.
Chart 5. Exports and foreign assets
Per cent of global GDP. 1870 - 2001
125 25
Exports
100 20
(righthand scale)
Assets (left-hand
75 15
scale)
50 10
25 5
0 0
1870 1890 1910 1930 1950 1970 1990 2001
Sources: IMF and Norges Bank
Today's globalisation has a historical parallel.
In the period preceding World War I, the world experienced a period of strong growth in trade and
cross-border capital flows. There were few political barriers and major technological advances fostered
growth in trade. Prosperity increased. But this period was interrupted, and in the interwar period
protectionism gained ground, with trade barriers and a contraction in international trade. This was
combined with an economic recession. In the post-war period, trade barriers have gradually been
scaled back. Trade picked up already in the 1950s, and since the 1980s financial markets have
become evermore interwoven.
Implications for the Norwegian economy
Intensified competition from Japanese and Korean shipyards had serious implications for Norwegian
shipbuilding in the 1970s and 1980s. However, Japan has also become an important market for
Norwegian products. From the considerable deficits of earlier years, trade in traditional goods with
Japan has moved into near balance.
Strong growth in Asia is probably one of the prominent factors contributing to high oil prices in spite of
low growth in the OECD area in recent years. China accounted for close to 50 per cent of the growth
in world oil consumption in 2002 and 2003. Trade in Asia has stimulated Norwegian shipping.
The Chinese economy could continue to expand at a brisk pace for a longer period, which would open
a large market that can also be entered by Norwegian enterprises. Norwegian exports to China have
increased, but are still limited.
Over several years, enterprises in Central European countries have been a source of competition for
Norwegian jobs. Integration is also opening new markets and providing new sources of income for
Norwegian enterprises. At the same time, tender requirements and the freedom of establishment have
increased the competition facing Norwegian industries that were previously sheltered.
Chart 6. Imports to Norway
Share. Per cent
12 12
9 9
China
6 6
Central Europe
3 3
0 0
1991 1993 1995 1997 1999 2001 2003
Sources: Statistics Norway and Norges Bank
A steadily larger share of Norway's consumer goods imports come from China and Central European
countries. Growth in imports from China was provided with an additional impetus after China became
a member of the World Trade Organization in 2001. Imports from Eastern Europe have also continued
to grow.
There are many economic agents in Norway that are benefiting from globalisation. Consumers are
enjoying lower prices for goods and services. Input prices have fallen and companies can sell their
products in new markets. But there are also costs. Norwegian businesses and jobs may lose in the
competition.
The challenge lies in moving idle resources to new business activities. This requires adaptability and a
sound cost policy.
Monetary policy
The operational target of monetary policy, as defined by the Government, is inflation of 21⁄2 per cent
over time. The target is symmetrical - it is just as important to avoid an inflation rate that is too low as
an inflation rate that is too high. The inflation target provides economic agents with an anchor for
inflation expectations.
Chart 7. Consumer prices and mainland GDP
Percentage growth. Average
10
GDP CPI
8
6
4
2
0
1970s 1980s 1990s
Sources: Statistics Norway and Norges Bank
History shows that there is no long-term trade-off between lower unemployment or stronger economic
growth and higher inflation. We witnessed this in the 1980s when growth was low and inflation high.
The task of monetary policy is to provide a nominal anchor. Low and stable inflation is such an anchor.
Why is a little inflation an advantage?
There are several reasons why it is an advantage for inflation to be higher than zero.
The structure of the economy is in flux. Demand for labour with different qualifications is changing.
This requires changes in relative wages. There are rigidities in nominal wage growth. Nominal wages
do not readily fall. With some inflation, relative wages can change without a fall in nominal wages.
There may also be rigidities in the pricing of goods and services. Some degree of inflation will thus oil
the economic machinery.
In periods, inflation and economic growth will be low. It is then appropriate for real interest rates to be
low, or even negative. Nominal interest rates cannot be set below zero. If inflation becomes
entrenched at a low level or near zero, the interest rate will be less effective as an instrument.
There are different ways of measuring inflation. The consumer price index tends to overestimate
actual inflation. The most important source of measurement errors is probably the difficulty of
distinguishing between changes in the quality and price of goods. In other countries, findings show
that the consumer price index overestimates actual inflation to the order of 1⁄2-1 per cent.
The conduct of monetary policy
Norges Bank normally sets the interest rate with a view to attaining an inflation rate of 21⁄2 per cent two
years ahead. If demand for goods and services is high and there is a shortage of labour, there will
normally be prospects of higher inflation. When the interest rate is raised, demand is dampened and
inflation is kept in check. If demand is low and unemployment rises, there will be prospects of lower
inflation. The interest rate will then be lowered. The inflation target thus represents a framework, not
an obstacle, for monetary policy to contribute to stability in output and employment.
In the long run, output is determined by the supply of labour and capital and adaptability, but in the
short and medium term monetary policy can also have an impact on the real economy.
Norges Bank operates a flexible inflation targeting regime, so that weight is given to variability in
output and employment and inflation. The economy grows over time. Output will in periods lie below
trend growth and in others above trend. Stabilising output growth means that one seeks to maintain
actual output near trend.
Chart 8. Mainland GDP
In billions of NOK. Constant 2000 prices
1200 1200
1000 1000
Trend
Actual
800 800
600 600
1980 1984 1988 1992 1996 2000
2003
Sources: Statistics Norway and Norges Bank
Monetary policy credibility
Expectations play an important role in price and wage formation. Expectations concerning inflation and
economic stability are of crucial importance for the foreign exchange market. Inflation expectations
also influence wage demands and pricing in the business sector.
With confidence in monetary policy, expected inflation in the long term will be close to the inflation
target. This alone contributes to stabilising inflation.
Surveys indicate that enterprises, the social partners and other economic agents expect inflation to be
21⁄2 per cent over time. Financial market participants also expect that inflation will be 21⁄2 per cent
ahead, as implied by long-term bond yields.
A flexible exchange rate
The krone exchange rate is an important channel for monetary policy.
The krone fluctuates. This is not surprising because other countries' currencies also fluctuate. The
krone exchange rate is the price of our currency measured in a foreign currency. Developments in
other countries are just as important for the krone as developments in the Norwegian economy.
Capital flows freely and flows can change rapidly. This can spill over to exchange rates and interest
rates as well as output and employment.
A structural feature of open economies like the Norwegian economy - with a national currency - is that
the exchange rate fluctuates.
The Norwegian krone does not stand out as particularly unstable. On the contrary, in countries like
Sweden, the UK, Switzerland, Australia, Canada and New Zealand, the exchange rate fluctuates just
as much - or more - than in Norway.
There is a cost involved for businesses in hedging against fluctuations in the krone. A krone that is
stable - but too strong - also entails costs in the form of low activity. Similarly, a krone that is stable -
but weak - is a source of high inflation.
Petroleum revenues generally provide substantial, but uneven currency inflows into Norway. The
currency flows might have resulted in a strong krone and large variations in the exchange rate. This
tendency is countered when the annual use of petroleum revenues over the central government
budget is predictable and independent of annual revenue inflows, and the remainder is invested
abroad. The capital outflow through the Petroleum Fund contributes to both curbing the appreciation of
the krone and maintaining its stability.
Chart 9. Trade-weighted exchange rate
Index. 1992 Week 1 = 100
a. Commodity economies b. Other economies
145
145
New Zealand
130
130
Australia UK
Switzerland
115
115
Norway
100
100
Norway
85
85
Canada
Sweden
70
70
1992 1996 2000 2004
1992 1996 2000 2004
Sources: Bank of England and EcoWin
Norges Bank has not defined an exchange rate target. Nevertheless, developments in the krone are of
considerable importance to interest-rate setting because exchange rate developments have an impact
on inflation and output. When there are prospects of moderate economic activity, low wage growth and
low inflation, Norges Bank will reduce the interest rate. This will normally result in a depreciation of the
krone. Prices for imported goods and services will increase. A weaker krone strengthens the
competitiveness of Norwegian enterprises and indirectly leads to higher output, employment and
inflation.
Themes in foreign exchange markets shift. In periods, investor focus on stock returns feeds through to
exchange rate movements. During periods of political and economic unrest, investors may choose
individual currencies as a safe haven - often the Swiss franc. In the autumn of 2002, the Norwegian
krone was probably also perceived as a safe haven. Wide fluctuations between major currencies have
a tendency to result in a weaker krone. In the past 12-18 months, developments in the interest rate
differential between Norway and other countries appear to have had a particularly marked impact on
our currency. Norwegian interest rates have been pushed down to the level prevailing abroad.
Chart 10. Exchange rate
NOK-EUR
7,0 7,0
7,5 7,5
8,0 8,0
8,5 8,5
9,0 9,0
03 03 03 03 03 03 04
jul
jan jan
mar mai sep nov
Source: EcoWin
BIS Review 11/2004
In the autumn of 2003, the krone showed a tendency to appreciate against the euro. This partly
reflected lowered market expectations concerning an interest rate increase abroad and expectations
that interest rates might rise earlier in Norway than in other countries. At the same time, the euro
appreciated in relation to other currencies. Changes in the krone resulted in an unintended tightening
of monetary policy. This trend was reversed in December owing to a reduction in interest rates and low
inflation figures. The interest rate reduction was probably of considerable importance as it eliminated
the excess return on NOK investments. Today, the krone is at a level that is more consistent with the
objective of promoting stability in output and employment. The weaker krone will contribute to a rise in
inflation from a level that is too low.
Normally, Norges Bank will not intervene in the foreign exchange market in order to influence the
exchange rate. Exchange market intervention, whether it be purchases or sales of foreign exchange,
is not an appropriate instrument for influencing the krone over a longer period. We do not wish to act in
a way that may trigger a game situation in the foreign exchange market. Foreign exchange
intervention rather than a change in the interest rate may give ambiguous signals to foreign exchange
operators and a game situation may arise.
Chart 11. Real krone exchange rate
Deviation from average. Per cent
15 15
10 10
5 5
0 0
-5 -5
-10 -10
-15 -15
1970 1980 1990 2000 2004
Source: Norges Bank
Although the krone may fluctuate in the short term, it will generally stabilise over time. When inflation
has been higher in Norway than among our trading partners for a longer period, the krone has
generally depreciated. When inflation in Norway is expected to be broadly in line with that of other
countries, the exchange rate will normally also return to its normal range following periods when the
krone has been particularly strong or particularly weak. This provides a basis for stable exchange rate
expectations.
The advantage of a flexible exchange rate is perhaps most evident when the economy is sluggish. If
the krone were to remain at a level that is too strong, nominal wages would have to remain unchanged
over a longer period or fall in order to bolster companies and jobs. This only occurs when
unemployment is very high. With a flexible exchange rate, a depreciation of the krone can also boost
competitiveness. A flexible exchange rate can reduce fluctuations in employment and output.
Empirical studies do not provide any evidence that floating exchange rates have reduced growth in
industrial countries. Rather, they suggest that industrial countries with floating exchange rates have
fared well, and often better, than countries with an exchange rate target. A precondition is that there is
an economic policy framework so that inflation does not spin out of control.
Economic developments and prospects
External cyclical developments and events have had considerable implications for developments in the
Norwegian economy.
Chart 12.
a. Output gap b. Inflation
Deviation from trend BNP. Per cent Per cent
4 5
4
US
2 Euro area
3
0
2
US
-2
1
Euro area
-4
0
1992 1996 2000 2004 1992 1996 2000 2004
Sources: OECD and EcoWin
The US fuelled the international upswing in the 1990s, with strong growth in private consumption,
rising equity prices and a high level of investment. Inflation was low because productivity increased.
In Continental Europe, the upturn started later and was weaker. Capacity utilisation in Germany and
France was low through most of the 1990s.
Chart 13. Short-term interest rates
Per cent
8 8
US
6 6
Euro area
4 4
2 2
0 0
1999 2000 2001 2002 2003 2004
Source: Norges Bank
The international upturn came to a halt in 2000. The bubbles in the equity markets burst. Many years
of high investment and rising unemployment led to excess capacity. The terrorist attacks on
11 September 2001 put a new damper on economic activity. From the summer of 2002 to the spring of
2003, a highly extraordinary accumulation of negative events in the global community - accounting
scandals, fear of terror, war and disease - put a brake on growth. US interest rates, which were
sharply reduced at the beginning of the downturn, have subsequently been reduced further. Interest
rates have also remained low in the euro area.
There are now clear signs that the global economy has passed the trough. However, while the outlook
is brighter, price inflation is still low and interest rates are being kept unusually low. Economic growth
is high again in the US. Employment is rising, but there is still excess production capacity and very low
inflation. It may take some time before interest rates are increased substantially in the US. Growth in
Asia is solid, but a global rise in interest rates is unlikely to start there.
Inflation is higher in the euro area than in the US and approximately in line with the objective defined
by the European Central Bank. In the euro area, however, capacity utilisation is very low,
unemployment high and the outlook for growth is weaker. Against this background, it will probably also
take time before interest rates rise markedly in the euro area.
Chart 14. USD/EUR and the US current account
balance as a percentage of GDP
0.8 0
USD/EUR (left-hand
scale)
1 -2
1.2 -4
Current account balance
(right-hand scale)
1.4 -6
1999 2000 2001 2002 2003 2004
Sources: OECD and Norges Bank
The imbalances in world trade represent a particular risk. The US is running a substantial trade deficit,
which was financed for a number of years by private capital flows to the US business sector. The flows
have subsided and led to a sharp fall in the US dollar at the same time as the euro has appreciated.
Through purchases of US government securities, Asian countries have thus far kept their currencies
stable against the US dollar.
The US federal budget deficit is an important source of the imbalances in world trade. It appears that it
will take time before the deficit is reduced to a considerable extent. This entails a risk that the dollar
will depreciate further and that US long-term government bond yields will move up. Growth in
Continental Europe, which is highly reliant on impetus from exports, may weaken markedly if the dollar
continues to fall.
Chart 15. Mainland GDP and employment
Annual growth. Per cent
6 6
GDP
4 4
2 2
0 0
Employment
-2 -2
1990 1992 1994 1996 1998 2000 2002 2004
Sources: Statistics Norway and Norges Bank
BIS Review 11/2004
Norway, like other countries, experienced a period of strong expansion in the 1990s. The expansion in
Norway lasted considerably longer than in other countries. In 1998, the economy shifted from an
upturn with high growth rates to an expansion with lower growth but low unemployment, labour
shortages in many sectors and strong growth in labour costs.
Wage developments culminated in the spring of 2002 and the expansion was reversed in the second
half of the year. Growth came to a halt and employment fell. A number of factors triggered this
development. Higher wage costs weakened the purchasing power of public entities. Global stagnation
had a dampening impact on Norwegian exports. In Norway, the interest rate was kept high after the
wage settlement and a persistent, unexpected low level of interest rates abroad resulted in a strong
krone. The sharp rise in electricity prices last winter also affected the domestic economy.
Chart 16. Inflation
Per cent
6 6
Goods and services produced in Norway
4 4
2 2
Underlying inflation
0 0
-2 -2
Imported consumer goods
-4 -4
-6 -6
1999 2000 2001 2002 2003 2004
Sources: Statistics Norway and Norges Bank
Consumer price inflation in Norway declined sharply through 2003. A number of factors appear to
have contributed to the decline.
The appreciation of the krone through 2002 pushed down import price inflation.
Chart 17. Price indicator for imported consumer
goods
Foreign currency. Percentage rise
3 3
2 2
1 1
A change in trade patterns and external economic conditions have resulted in an unexpectedly sharp
fall in import prices, even when measured in terms of what Norwegian importers pay in foreign
currency.
Chart 18. Price indicator for imported consumer
goods
Foreign currency. Index. 1992 Q1 = 100
120 120
Other goods
100 100
Footwear
80 80
Clothing
Audiovisual equipment
60 60
1992 1994 1996 1998 2000 2002 2003
Source: Norges Bank
The change in trade patterns has made a considerable contribution to the sharp decline in prices for
clothing, shoes and audiovisual equipment. Rapid technological advances have also pushed down
prices for audiovisual equipment.
In Norway, competition has probably increased in the retail industry and other service sectors in recent
years. Initially, heightened competition affects companies' profit margins. But enterprises will respond
by reducing their costs. This will occur in part in the individual enterprise, but subcontractors will also
be required to reduce their prices and enhance efficiency. Therefore, increased competition usually
triggers higher productivity growth in the economy. Low inflation may therefore be matched by growth
in productivity.
Chart 19. Import-weighted krone exchange rate
and interest rate differential against trading
Index partners Per cent
80 5
85 4
90 3
95 2
Krone exchange rate
(left-hand scale)
100 1
Interest rate
105 0
differential
(righthand scale)
110 -1
2000 2001 2002 2003 2004
Source: Norges Bank
BIS Review 11/2004
The cyclical downturn last winter, low wage increases last year, fiscal discipline, an unexpected
decline in inflation and prospects of low inflation have resulted in a considerable easing of monetary
policy. The interest rate has been reduced by 5 percentage points and is now approximately the same
as among our trading partners. The krone has depreciated by about 12 per cent over the past year,
and has returned to the level prevailing in the summer of 2001 and is in line with the average for the
1990s.
Chart 20. After-tax real interest rates
Quarterly figures. Per cent
10 10
8 8
3-month rate
6 6
10-year rate
4 4
2 2
0 0
1990 1992 1994 1996 1998 2000 2002 2004
Sources: Statistics Norway and Norges Bank
Monetary policy is expansionary now. This is reflected in low after-tax real interest rates. A long-term
real yield on 10-year bonds can be estimated at about 1 per cent. We have adjusted the nominal
interest rate for expected inflation. The short-term real interest rate is estimated at 11⁄2 per cent. We
have then adjusted the figure for actual inflation. The fall in nominal interest rates in 2003 has also
reduced household net interest expenses. This has increased household purchasing power
considerably.
Chart 21. Labour costs in Norway compared
with trading partners
Index. 1990=100
110 110
105 105
100 100
Local currency
95 95
Common
currency
90 90
1990 1992 1994 1996 1998 2000 2002 2004
Sources: TRCIS, Ministry of Finance and Norges Bank
BIS Review 11/2004
The fall in the value of the krone over the past year has strengthened the Norwegian business sector.
The business sector is, however, still feeling the effects of a sharp rise in labour costs over a period of
several years. Relative labour costs measured in a common currency are in line with the level
prevailing in 1990, but approximately 10 per cent higher than in the mid-1990s. The internationally
exposed sector has been scaled back. Those companies that are currently operating may be in a
better position to bear the high wage level. Nevertheless, costs may limit activity and employment.
Growth in the Norwegian economy picked up again through the summer of 2003. In the period ahead,
solid growth in household income, subdued consumer price inflation and low interest rates will provide
the conditions for high growth in private consumption. There is optimism in the building and
construction sector. High petroleum investment is also supporting activity while mainland business
investment has been low for a long period.
The number of persons employed began to increase in the summer of 2003 and unemployment
stabilised.
An economic turnaround has occurred, with a soft landing after the long period of high cost inflation in
Norway and a low level of activity in other countries.
But inflation is too low.
As mentioned, there are three main factors that have contributed to this.
First, the global downturn had considerable implications for the impact of interest-rate setting in
Norway. A strong krone contributed to the decline in inflation. The krone has now returned to its
previous level so that the effect will be reversed.
Second, low inflation in other countries and rapid changes in the international division of labour have
resulted in a fall in prices for imported goods and services, even when measured in terms of what
Norwegian importers pay in foreign currency.
Third, intensified domestic competition also appears to have exerted downward pressure on prices.
As a result of both changes in the international division of labour and increased domestic competition,
there is idle labour and available real capital in Norway. We cannot rule out that adjustments will be
made over a period of time and that these adjustments will encompass a large portion of the domestic
economy. Thus, it is possible that the level of output that is consistent with stable inflation will
increase.
Inflation will remain low in 2004. However, the easing of monetary policy will gradually push up
inflation. As mentioned, it may take some time before interest rates in other countries are increased to
a considerable extent. We have seen that in periods, the krone is heavily influenced by changes in the
difference between interest rates at home and abroad, and we must take this into account when
setting interest rates. Themes in foreign exchange markets may shift, however. The impact of interest
rate changes on the exchange rate may be less pronounced.
When inflation gradually moves up from a very low level, there will be a basis for gradually moving
towards a more normal short-term interest rate level in Norway. This may counter the emergence of
excessive pressures on domestic resources in the medium term. Interest rate developments in other
countries may also have considerable impact on the krone and hence on Norwegian interest rates.
When inflation is low - and as low as it is now - it is appropriate to place considerable emphasis on
pushing up inflation. Therefore, we are particularly vigilant with regard to consumer price
developments.
Financial stability
Developments in real economic variables are mirrored in credit markets.
In recent years, household income has shown solid growth, and household confidence has been high.
However, corporate earnings have been low, and until recently enterprises have primarily focused on
enhancing efficiency.
Credit developments are giving ambiguous signals to our interest-rate setting. Growth in household
borrowing is high, but enterprises are reducing debt. The change in the breakdown of credit may have
been amplified by banks' increased eagerness to extend credit to households after a period of losses
on loans to the business sector. Total credit is expanding broadly in line with normal growth in nominal
GDP.
Chart 22. Credit growth
Per cent
24 24
20 20
Non-financial enterprises
16 16
Households
Total credit
12 12
8 8
4 4
0 0
-4 -4
1997 1998 1999 2000 2001 2002 2003
Source: Norges Bank
Chart 23. Enterprise credit and investment
Nominal growth. Per cent
30 30
Credit
20 20
10 10
0 0
-10 -10
Fixed investment
-20 -20
-30 -30
1983 1987 1991 1995 1999 2003
Sources: Statistics Norway and Norges Bank
Developments in credit to enterprises shadow developments in their investments. Low credit growth
indicates that mainland business investment has not yet picked up.
Household debt has increased sharply since 1999. Developments in debt in the 1990s may partly be
interpreted as a delayed adaptation to the deregulation of the housing and credit markets in the 1980s
after many households experienced financial difficulties following the relaxation.
Moreover, there now seems to be a tendency towards investing in property and incurring loans at a
more mature age so that younger generations not only inherit dwellings, but debt as well. Both debt
and wealth are on the rise for these more mature age groups.
Household credit demand is closely linked to developments in the housing market.
House prices have risen by an average of around 9 per cent o