there are now growing concerns that high oil prices may have a stronger impact on inflation and inflation expectations. monetary policy easing in response to this may then trigger a more pronounced downturn. high oil prices have a different impact in norway than in oil - importing countries. a rise in oil prices improves our terms of trade. other countries perceive this as an externally imposed tax. as a result of persistently high oil prices and expectations that oil prices will remain high, investment in the petroleum sector may reach record levels this year. the investment intentions survey for the petroleum sector points to very high growth. the analyses in inflation report 2 / 05 are based on a baseline scenario where the key rate shadows forward interest rates up to 2007, and then rises somewhat more rapidly. the krone exchange rate is assumed to shadow the forward exchange rate, which remains broadly unchanged over the next three years. private consumption accounts for just under 60 per cent of total demand in mainland norway, and is an important channel through which monetary policy operates. low real interest rates, solid growth in real disposable income and a continued sharp rise in house prices will result in high growth in private consumption again this year. higher employment and somewhat higher wage growth will continue to contribute to growth in household demand in the period ahead. household debt, however, has risen sharply. a gradual normalisation of interest rates will reduce growth in household disposable income. this suggests lower growth in consumption. we assume that households will choose to spread consumption over time, so that the saving ratio will continue to fall even if interest rates rise. housing investment rose sharply last year. it appears that growth in residential construction will remain high this year, although the rate of growth is expected to slow somewhat through the year. low interest rates may have contributed to moving forward some housing projects. a gradual normalisation of interest rates implies more moderate growth in housing investment. developments in underlying demand for housing may also imply that residential construction will stabilise and gradually decline somewhat. household debt has increased at a faster pace than income over the past ten years. norges bank ’ s calculations indicate that debt growth may largely be due to the sharp rise in house prices in recent years. higher house prices have a fairly prolonged effect on household debt growth. as a result, credit growth will remain high for a fairly long period even though the rise in house prices is expected to slow. given the assumptions underlying our projections, it is likely that debt will continue to grow at a faster

jon nicolaisen : will debt be reduced? speech by mr jon nicolaisen, deputy governor of norges bank ( central bank of norway ), at the norwegian academy of science and letters, oslo, 9 april 2019. * * * accompanying slides of the speech. why do we have debt? nearly 50 years ago, on 23 december 1969, phillips petroleum informed the norwegian authorities of a major oil discovery on the norwegian shelf. when it came time to develop the shelf, the norwegian government decided to invest through direct ownership, financing its direct investment in oil activities with foreign borrowing. between 1973 and 1979, norway ’ s public debt soared, and norway ’ s current account deficit climbed to more than 10 percent of gdp. the project was risky. up until 1972, oil prices had hovered around usd 2 per barrel. the cost of producing middle eastern oil was a fraction of this, while production costs in the north sea were far higher. even so, the norwegian authorities took a chance and started to develop the north sea with borrowed capital. today, it is safe to say that this decision was a good one. why do we borrow? the fundamental reason is that borrowing – credit – makes it possible to bring forward consumption and investment. credit enabled norway to finance its investment in the oil sector. credit enables consumers to buy a home early in the life cycle rather than waiting until middle age. credit can be used to finance education, a car and a place to live while we are young and enables us to enjoy the benefits while earning money to pay for them. over the past century, a modern financial system has evolved that provides ample access to credit. a welldeveloped credit market is an important part of a well - functioning economy. there is another side of the coin : once we have incurred a debt, it remains with us. the debt must be repaid – with interest. we might say that while credit is an unvarnished good, debt is a necessary evil. paying for bread already eaten can be tough. when we borrow money, we draw up a repayment plan with the bank. implicit in this plan are a number of expectations – regarding our future earnings, net worth and interest rates. if these expectations pan out, the plan succeeds. we arrive at the desired outcome. and many times, the future turns out even better than expected. in recent decades, house prices have risen and with them our wealth. income growth in norway has been high and has benefited nearly everyone. at the