employees. measured in terms of person - hours worked, employment growth was solid last year. inflation was low in 2004. underlying inflation rose by 0. 3 per cent from 2003 to 2004. the unusually low rise in prices for imported consumer goods over the past few years is partly due to structural developments, primarily changes in norwegian import patterns. it is difficult to estimate how long the effect of these changes will last. high capacity utilisation, a tighter labour market and higher wage growth imply that the rise in prices for domestically produced goods and services will move up in the years ahead. the projections for the years ahead are based on a gradual rise in the interest rate. this is in line with financial and foreign exchange market expectations. a gradual rise in the interest rate will after a period curb the strong growth in demand, and capacity utilisation in the economy will decline and then stabilise. economic policy tasks the various components of economic policy have varying effects. this is why they have different functions : • monetary policy steers inflation in the medium and long term and can also contribute to smoothing swings in output and employment. • the central government budget – growth in public spending – influences the krone and the size of the internationally exposed business sector in the medium term. government expenditure and revenues must be in balance in the long term. • wage formation, the structure of the economy and incentives determine how efficiently we use our labour resources and other economic resources. there is also an interaction : • in its budget resolutions, the government authorities will attach importance to the effects of the budget on the norwegian economy and will therefore take account of interest rate effects. in this way, they avoid a situation where growth in public spending and the interest rate push the economy in different directions. • with a known monetary policy response pattern, the social partners can take into account interest rate effects when wage increases are agreed. • moreover, the parties to public sector negotiations can take into account that the higher pay increases are, the fewer people can be paid over government budgets. the interaction here came into clear evidence when employment in the general government sector fell after the expensive wage settlement in 2002. the authorities can achieve better economic policy results if they can commit in advance to a set of credible policy rules. households, enterprises and capital markets are forward - looking in their decision - making. it is therefore important that the authorities do not create doubt, but on the contrary act in a long - term and predictable manner. there must be consistency between plans

different. the high inflation expectations that were built into long - term interest rates no longer exist and a further marked fall does not seem likely, nor for that matter does any substantial inflation - driven increase in long - term rates. purchasing a home is a long - term investment. a fixed - rate mortgage reduces borrowers ’ uncertainty about expenses over the life of the loan. longer - term financing in banks banks play an important role in the economy. their task is to convert short - term deposits into long - term loans. in times of crisis, fulfilment of this task is put to the test. a century ago, depositors could lose confidence in the banks and rush to withdraw their savings. however, deposits stabilised when guarantee schemes were established in the 1930s. loans to households make up a third of banks ’ assets. residential mortgage loans are longterm loans. at the same time, funding for norwegian banks has changed. market funding has assumed a more important role. in recent years, both short - term market funding and funding in foreign currency have grown in norwegian banks. banks have increasingly transformed short - term deposits from international money markets into long - term domestic lending. this is the main reason for the strain on liquidity experienced by norwegian banks when foreign funding came to a halt in 2008. for norwegian banks, the financial crisis has primarily been a liquidity crisis and not a solvency crisis. the authorities all over the world are currently reviewing the regulation of banks ’ liquidity. the basel committee on banking supervision presented recommendations on quantitative liquidity requirements in december 2009. the uk, switzerland and new zealand have introduced, or are in the process of introducing, stricter rules. norwegian banks must also expect the regulation of liquidity to be more stringent in the future. it will be more difficult to base housing finance on short - term funding. issuing covered bonds may be an alternative. the collateral pool for covered bonds may comprise residential mortgages or mortgages for holiday homes with a loan - to - value ratio ( ltv ) of up to 75 per cent, commercial property mortgages with an ltv of up to 60 per cent or loans to public sector entities with an ltv ratio of up to 100 per cent. these instruments are highly collateralised, carrying lower risk premiums than ordinary bank bonds, and are well suited to pension fund investment and other investments with a long - term horizon. according to the rules for the issue of covered bonds, the value of the cover