4 current account balance ( right - hand scale ) 1. 4 - 6 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 gdp employment - 2 - 2 sources : statistics norway and norges bank 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 goods and services produced in norway underlying inflation - 2 - 2 imported consumer goods - 4 - 4 - 6 - 6 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 - 1 - 1 - 2 - 2 - 3 - 3 2002 2003 source : norges

may prove to be particularly challenging for borrowers to assess their debt - servicing capacity over time at a time when the interest rate is abnormally low. 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 loans 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 interest - rate setting. a sharp rise in asset prices and debt accumulation may pose a risk to economic stability. with a view to mitigating this risk, it will be appropriate in some situations to apply a somewhat longer - than - normal time horizon than two years to attain the inflation target. however, at present debt accumulation is high only in the household sector. enterprises are accumulating little debt. house prices are rising, but non - residential property prices are stable. the debt to income ratio is now in line with the level recorded at the beginning of the 1990s. 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. the interest rate can be used to reduce credit demand. at present - with low interest rates abroad and a close link between domestic interest rates and the krone - a tighter monetary policy would restrain credit demand primarily because job security would be reduced. a flexible inflation targeting regime reduces the possibility of exposing households to a double shock in the form of higher unemployment and higher interest rates, as was the case prior to the banking crisis in the beginning of the 1990s. if the economy is exposed to disturbances that lead to higher unemployment, inflation will normally decline and interest rates be lowered. chart 27. debt and interest expenses per cent of household income interest expenses ( left - hand scale ) debt ( right - hand scale ) 1987 1989 1991 1993 1995 1997 1999 2001 2003 sources : statistics norway and norges bank conclusion to sum up : the operational target of monetary policy is inflation of close to 2½ per cent over time. norges bank operates a flexible inflation targeting regime, so that weight is given to variability in output and employment and inflation. norges bank has not defined an exchange rate target. a flexible exchange rate enhances stability in output and employment. a structural feature of open economies