such as metals. slightly higher import prices have also had a negative impact. second, an ample supply of labour has boosted output growth. a strong increase in the population has expanded the growth capacity of the norwegian economy without a comparable increase in wages. in particular, the supply of foreign labour has increased sharply after eu enlargement in 2004. over the past two years, these labour inflows have accounted for over 30 per cent of growth in the labour force in norway. at the same time, this has enabled norwegian companies to be bolder in accepting new assignments and making investments, in the knowledge that they can procure labour throughout europe. third, productivity growth has been unusually high, for both companies competing on international markets and those supplying goods and services to the domestic market. the result is lower production costs. banks and other service sectors, in particular, have outperformed other countries in this respect. the business sector has been quick to adapt and change, and to make use of new technology that is available in an international market. this is probably due to the modernisation of the functioning of the economy through the 1980s and 1990s, which resulted in more efficient markets. in addition, growth in labour productivity reflected a marked fall in sickness absence in 2004. the outlook for the norwegian economy monetary policy influences the economy with a lag. norges bank therefore has to be forward - looking in its interest rate setting. developments in prices and capacity utilisation in norway are influenced by both domestic conditions and economic developments in other countries. since the end of june, global money and credit markets have been characterised by sharp fluctuations, liquidity shortages and reduced risk willingness. the turbulence stems from problems in the us mortgage market. defaults on subprime mortgages in the us began in the second half of 2006. securities portfolios had been developed around these mortgages. uncertainty arose among banks and investors that were directly or indirectly exposed to losses on subprime mortgages. expected losses on mortgage - backed securities rose. investors became gradually less willing to take risk. the premium on corporate securities increased markedly. the credit premium has been highest on the lowest rated securities, i. e. securities backed by subprime loans. another effect of the turbulence is credit migration, i. e. that the rating of securities has changed as the consequences of the unrest have become apparent. for example, a security that had an aaa rating, may now be rated aa or lower. the turmoil spread rapidly to other

. this contributes to sustaining high credit growth. as a result of low interest rates, the household interest burden will remain fairly low in spite of high debt growth. it may prove to be particularly challenging for borrowers to assess their debt - servicing capacity over time in a period when the interest rate is abnormally low. such a low interest rate also places greater demands on banks in assessing the creditworthiness of borrowers. 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 on a par with the level abroad. this interest rate, with an addition for banks ’ margins, provides a more realistic indication of the interest rate level that will apply over the loan ’ s life than the floating interest rates prevailing today. the interest rate can be used to reduce credit demand. at present - with continued 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 as a result of a stronger krone. 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 turnaround has occurred in the norwegian economy. the economy has experienced a soft landing after the long period of high cost inflation in norway and sluggish external activity. • output has returned to trend and is now showing a marked rise. • employment has returned to trend and is rising. • unemployment is at the 1996 - level and is equal to the average for the 1990s. • wage growth is broadly in line with a level that is consistent with the inflation target given normal productivity growth. • overall credit growth is balanced. credit is expanding approximately in line with trend growth in nominal gdp. • labour costs in norway relative to our trading partners are now broadly in line with a long - term average. • the nominal krone exchange rate is on a par with the average for the 1990s. • the interest rate level is close to the level prevailing among our trading partners. • inflation expectations are approximately the same as the target. in this respect, there is equilibrium in the norwegian economy. but the current inflation rate is low, and external and domestic interest rates are low. lagged effects of the strong krone in 2002 are exerting downward pressure on inflation. at the same time, a change in trade patterns and