we have instead decided to use some time to bring inflation back to target. household debt has risen sharply since the mid - 1990s. at the same time, house prices have shown a marked increase. debt developments through the 1990s can probably be viewed to some extent as a delayed adaptation to the deregulation of the housing and credit markets in the 1980s, after many households burned their fingers immediately after the deregulation. at the same time, the credit market has deepened. new loan products have emerged, and it is easier to raise loans. borrowers can choose their repayment schedule. credit and housing market liberalisation provides homebuyers with the opportunity to establish a high housing standard early in their adult lives and draw on this capital later in life. in recent years, household income growth has been solid, household confidence regarding the future has been strong and households probably perceive higher income levels as permanent. this may have resulted in a further rise in house prices and debt. in addition, low real interest rates are currently contributing to this. we have limited scope for restraining structural changes that take place when households increase their debt over several years in order to invest in housing and other property and assets. an interest rate level that effectively restrains this restructuring process would also have had adverse effects on economic activity. however, households are more vulnerable when debt is high. long periods of sharply rising asset prices and debt may be a source of subsequent instability in production and employment. we believe that expectations regarding interest rate developments have a greater impact on household and business borrowing and investment behaviour than actual interest rates. norges bank communicates its analysis of the outlook for the norwegian economy and the interest rate. at this juncture, the outlook for output and inflation suggests that the interest rate should be gradually – in small, not too frequent steps – brought up to a more normal level. 7 the economic outlook is uncertain. we illustrate interest rate uncertainty ahead with a fan chart, which is meant to capture the outcome with a 70 per cent probability. the consequences of higher interest rates for two households are illustrated in this chart. both households comprise two adults and two children. one household has a gross income of nok 800 000 and nok 2 million in debt. the other has an income of nok 600 000 and nok 1. 5 million in debt. the chart shows the two households ’ income after basic expenses and interest and principal payments have been paid. the household with an income of nok 800 000 can cope reasonably well

because wage growth is higher in norway than abroad. the real exchange rate, measured by developments in consumer prices in a common currency, is in line with a historical average, but may rise ahead as a result of higher inflation in norway relative to other countries. key rates are now close to zero in many countries. key rate expectations abroad have fallen. market participants expect a rise in key rates in a number of countries after the turn of the year. monetary policy in norway is oriented towards maintaining low and stable inflation. the operational target is annual consumer price inflation of close to 2. 5 per cent over time. the inflation target is an anchor for inflation expectations in the foreign exchange market, for the social partners in connection with wage settlements and for those setting prices for goods and services. in recent years, average inflation has been fairly close to, but somewhat lower than, the target of 2. 5 per cent. consumer price inflation peaked in october 2008 and has since receded. in the year to august 2009, cpi inflation was 1. 9 per cent. inflation measured by the cpi varies somewhat from month to month, primarily reflecting wide fluctuations in energy prices. cpixe inflation shows developments in the consumer price index adjusted for tax changes and excluding temporary changes in energy prices. this indicator provides a more accurate picture of underlying inflation. by this measure, underlying inflation peaked at 3 per cent last autumn, but has since slowed somewhat and was 2. 3 per cent in august. underlying inflation is now below the inflation target. inflation is slowing as a result of the decline in output and wage growth last year and the beginning of this year and is expected to fall to below 2 per cent in early 2010. inflation ahead will depend on how quickly capacity utilisation picks up and by developments in the krone exchange rate. activity in the norwegian economy has held up better than expected just a few months ago. higher capacity utilisation and low productivity growth may result in stronger - than - expected upward pressure on costs and point towards somewhat higher inflation in the medium term. the financial crisis and the global economic recession have had a substantial impact on the norwegian economy, and a range of measures have been implemented to mitigate the effects of the crisis. these measures prevented the liquidity crisis from developing into a solvency crisis in the banking sector and a crisis in the real economy in norway. norges bank has supplied additional liquidity to banks and eased collateral requirements. the bank has provided loans with longer maturities, used foreign