stated, the labour market will be the pivotal issue in the years to come. the number of people in the groups with the highest participation rates is declining, which sets limits to labour - force growth. all indicators point to by and large unchanged employment, in contrast to the preceding years ’ increases by 70, 000 since 2003 when the upswing began. the labour shortage will dampen the continued upswing. in 2006, wage increases have been gaining momentum, and domestic price pressure has been building up gradually. it is uncertain how much this adjustment process will ultimately impact on inflation. the housing market attracts high attention, and rightly so. we have witnessed very strong increases in real property prices, especially in the greater copenhagen area. the most recent indicators point to continued, but more moderate, price increases. some of the most expensive areas show signs of slightly receding prices, and in more and more cases the price when the property was first put up for sale is later reduced. the low interest rates have been a principal driver of the growth in housing prices. in 1998 fixed - rate loans accounted for 80 per cent of the households'total borrowing from banks and mortgage - credit institutes. this share has now shrunk to 40 per cent. so more than half of the outstanding loans are adjustable - rate or outright variable - rate loans, and it is expected to be more expensive for borrowers to service their loans in 2007 due to the increases in short - term interest rates over the last year. taking into account that the households also have interest income, their net interest expenses after tax will increase by just over kr. 2 billion, or 0. 3 per cent of consumption. interest rates have the strongest impact on activity via their effect on the timing of decisions regarding consumption and investment. despite the higher interest rates, real interest rates after tax are still very low – barely over 1 per cent in most cases. the level of interest rates therefore still has an expansionary effect on the danish economy. the economic upswing is also reflected in the financial system. the banks'balance sheets are growing strongly. at the same time, profits are record - high, labour is in short supply, wages are on the increase and there have been cases of large bonus payments. the banks ’ lending is growing by more than 20 per cent year - on - year. the breakdown on business lending and lending to households follows a familiar pattern. lending to households enters the stage first in a consumption - driven upswing, and

nils bernstein : recent economic and financial developments in denmark speech by mr nils bernstein, chairman of the board of governors of the national bank of denmark, at the annual meeting of the danish bankers association, copenhagen, 6 december 2006. * * * thank you for inviting me to speak here at the annual meeting of the danish bankers association. the danish economy is still booming, and there is no sign of any slowdown in the near future. the upswing started in mid - 2003 and has gained momentum since then. originally underpinned by income - tax cuts, the upswing has been gradually reinforced by the remarkable growth in the international economy. in this picture, europe has generally lagged behind the rest of the world, but now that economic growth seems to be receding in the usa, activity is on the increase among our most important trading partners in europe. the danish upswing has brought unemployment down to the lowest level since the oil crisis in the 1970s. in contrast to previous upswings, the balance of payments is still strong and the government surplus rests on a sound structural foundation. however, a complete picture of the danish economy also includes risks. the global imbalances are still significant, with the enormous us current - account deficit as the dominant feature. overall, the imbalances are still generally expected to be redressed over time. the us economy is slowing down due to the receding housing market. the risk of more abrupt adjustment cannot be ruled out, though. however, the danger signals regarding the danish economy come from within. the future course will depend on denmark's ability to tackle the situation. for a long time low inflation and moderate wage increases have been the order of the day in denmark, just like in many other countries. this phenomenon is among other things the result of growing recognition of the favourable economic effects of low inflation. low unemployment combined with continued robust growth in the demand for danish goods entails a risk of the pressure on the labour market leading to higher inflation. it is well - known that this can cause unemployment to rise at a later stage. although this is not considered to be the most likely course of events, the risk of detrimental overheating of the economy is growing. against this background danmarks nationalbank has recommended – and continues to recommend – measures to dampen the overall increase in demand in order to ensure sustained favourable economic development in denmark. danmarks nationalbank has noted that the government has adopted a wait - and - see approach. as