According to money market expectations, the interest rate will eventually stabilise around 5½ per cent. This is consistent with an inflation target of 2½ per cent and a long-term real interest rate in line with the level abroad. This interest rate, with a mark-up for banks’ margins, provides a more realistic expression of the interest rate level that will apply over the loan’s life than the floating interest rate prevailing today. When the interest rate is abnormally low, it can be particularly challenging for borrowers to assess their debt-servicing capacity over time. Such a low interest rate also places particular demands on banks in assessing the creditworthiness of borrowers. But experience has shown that the underlying cause of loan defaults can be overly optimistic assessments on the part of both the lender and borrower. House prices and developments in household credit influence consumption and housing investment. We seek to take account of these indirect effects in our interest-rate setting. Household debt has increased sharply over the past decade. 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. We have limited scope for restraining structural changes that occur when households increase their debt over several years to invest in housing and other property and assets. An interest rate that would effectively restrain these structural adjustments would also have an adverse impact on output and employment.

Only the public sector, retail trade and other services are planning to invest somewhat more compared with last autumn. Employment in Northern Norway does not seem to be on the rise in the private or public sectors, with the exception of the construction industry. Firms generally report that they have considerable idle capacity and that they are continuing to rationalise operations. At the same time, selling prices are rising moderately in the export industry and services, but falling slightly in manufacturing for the domestic market. Strong competitive pressures provide limited scope for price adjustments. This applies for example to transport and logistics firms, which are expecting further pressure on prices when the EU enlargement on 1 May makes it easier for foreign competitors to enter the market. Some equipment suppliers, however, announced substantial price rises for some intermediate goods. Profitability is increasing moderately in all sectors except manufacturing. One third of the labour force in Norway is employed in the public sector. In Northern Norway, this proportion is closer to 45 per cent. The primary industries are important for the counties in Northern Norway, especially because of the abundant fish resources in coastal areas. A large part of the fishing industry is export-oriented and is increasingly competing with low-cost countries. These industries will be vulnerable when the rise in domestic costs is high. There are wide regional variations in unemployment. At end-February, an average of 4.5 per cent of the labour force in the three northernmost counties was registered as unemployed.