negotiated pay increases were very high this year. • in public sector wage settlements, little emphasis appears to have been placed on the assumptions concerning wage growth on which government allocations are based. this has a negative impact on service production in many areas of the public sector. the experience of this year ’ s wage settlement also indicates that profitability in the internationally exposed sector has been given less emphasis in wage negotiations than earlier. a shortage of labour in more sheltered industries may thus have a greater influence than previously on overall wage growth. inflation would then be determined by domestic factors to a greater extent than in the past. the norwegian economic system has undergone substantial changes over the past ten to twenty years. the model based on detailed control of capital, credit and interest rates and centralised coordination has been abandoned. less emphasis is placed on having discretionary scope for manoeuvre and on using surprise decisions to influence economic developments. it is recognised that the structure of the labour market and of wage formation has a decisive impact on developments in employment. monetary policy is delegated in norway and in comparable countries. the monetary policy guidelines provide a foundation for building credibility and creating confidence in economic policy, thereby making it more effective.

. inflation has declined and contributed to a fall in nominal interest rates. a more stable inflation environment also results in lower real interest rates when investors become more certain about returns. furthermore, it would appear that high saving in some parts of the world is pushing down long - term interest rates. saving is high both in oil - producing countries, china and other asian countries. long - term interest rates in norway largely shadow external interest rates because like other countries norway is keeping inflation in check. norwegian households primarily finance house purchases by means of floating - rate loans. long - term interest rates are still of considerable importance because they provide information about the future path of short - term interest rates that borrowers can expect over time. unusually low short - term interest rates have probably also boosted the rate of increase in house prices in recent years, but this effect will be reversed when the interest rate is raised to a more normal level. short - term interest rates have influenced the path for house prices over the past 15 years, but periods of low interest rates are followed by periods of higher interest rates. norges bank ’ s key policy rate is therefore of limited importance for house price inflation over a period of 15 to 20 years. the housing stock in norway, which numbers a good 2. 2 million dwellings, shows little change from one year to the next. as a result, higher demand for housing will primarily translate into higher prices in the short term. in the 1990s, housing starts in norway were fairly low in relation to growth in the number of households. moreover, population growth has been higher in recent years, largely reflecting a high level of immigration. in 2006, the population increased by more than 40 000 and the number of households by roughly 30 000. furthermore, migration patterns in norway follow the business cycle. migration to densely populated areas is now rising. demands for high standards and new building regulations have also pushed up housing construction costs and thereby house prices. the main determinants of house price inflation have long been income, unemployment, interest rates and residential construction. over the past few years, inward migration and domestic migration patterns may also have contributed. in the past year, however, house price inflation has been higher than implied by these factors. a large share of the increase in 2006 cannot be explained by previous patterns. developments since the beginning of the 1990s may have engendered expectations that house prices will only continue to rise. this may have increased house purchases for pure investment purposes and induced younger buyers to enter the housing