Chart: Level of debt high for many households Direct losses associated with loans to households are seldom large in Norway. Even during the banking crisis 20 years ago, losses were limited. However, historically low losses are no guarantee of low losses in the future. A mutually reinforcing dynamic of rising debt and increasing property prices characterises the run-up to financial crises. Higher property prices lead to higher collateral values for loans. With easier access to credit, purchasing power increases. The household debt burden is now higher than prior to the banking crisis. The increase has been highest for middle and lower income groups (deciles). The number of households with a very high debt burden is also far higher. The number is sufficiently high to engender negative spillover effects in the economy in the event of an abrupt change in household behaviour. Such spillover effects may in their turn affect bank losses, which is the main reason that the work on financial stability places particular emphasis on developments in the household sector. While monetary policy and fiscal policy have been anchored within a long-term, operational framework over the past ten years, there has been no comparable, coherent regulatory system for financial markets. Requirements are currently imposed on individual banks, but without adequate regard to overall risk in the financial system. This became clear during the financial crisis. New regulations are underway. The new Basel III framework aims to establish a long-term framework for financial market regulation that lays the basis for a robust financial system.

Chart: Price and cost levels relative to trading partners Price and cost levels in Norway relative to trading partners have weakened Norway’s competitive position in recent years. So far this has not been an obstacle to solid growth and near-normal capacity utilisation in the Norwegian economy, partly as a result of high prices for many of our exports. Nevertheless, we should bear in mind that a high cost level makes us vulnerable, particularly in the event of any renewed downturn in the global economy. Chart: Oil price (Brent Blend) The Norwegian economy emerged quickly and fairly painlessly from the global economic downturn partly owing to high prices for oil and other commodities. Norway’s terms of trade have improved further. High commodity prices and strong growth in emerging economies are an advantage for both commodity-based industries and high-technology export firms. Norwegian exports are increasing. Unemployment is slightly lower than expected and it appears that wage growth in 2011 will be somewhat higher than envisaged in the March Monetary Policy Report. Norway has been fortunate, but effective systems for managing high revenues have probably also played a role. 2  BIS central bankers’ speeches  2. A decade of inflation targeting  Chart: Inflation A decade has passed since the inflation targeting regime was introduced. Inflation has varied in this period, although less so than previously, and has generally been close to target. Inflation expectations now seem to be firmly anchored. This shows that monetary policy has been effective.