Output will in some periods lie above and in others below the long-term trend.2 Stabilising output means seeking to maintain actual output near trend. There is one main monetary policy instrument: the interest rate. The interest rate is set with a view to achieving low and stable inflation, while at the same time seeking to avoid substantial variations in output and employment. In recent years, household income has shown solid growth, and household confidence has been high. High growth in labour costs over a number of years, the cyclical downturn in the world economy and a strong krone in periods resulted in deteriorating profitability in many companies. Employment and  1  Berg, Clas and Lars Jonung (1998): “Pioneering Price Level Targeting: the Swedish Experience 1931-37”, Conference on Monetary Policy Rules, Stockholm, 12-13 June 1998. 2  Trend growth has been used as a rough estimate of potential output. Potential output is the level of output that is consistent with stable inflation over time. BIS Review 47/2004  1  investment fell. The level of household borrowing is high, while enterprises have reduced debt. High debt growth increases the vulnerability of households to economic disturbances. Wage growth has slowed now and the krone has depreciated. A turnaround is taking place in corporate earnings and there are also signs of this in investment and credit demand. The interest rate can be used to reduce credit demand.
In retrospect, this should perhaps have flashed more of a warning signal, but with credit card receivables starting from a very low base, it was not surprising that the amount outstanding should expand rapidly. The quality of the card portfolio actually held up well for some time. But the cumulative effects of deflation, rising unemployment and increasing indebtedness were taking an increasing toll. Coupled with the delayed impact of the more permissive bankruptcy regime introduced in 1998, these factors produced an explosion of personal bankruptcies in 2002. Bankruptcy petitions jumped to almost 27,000 in that year and the charge-off ratio for credit cards rose to 13.25%, compared with 5.46% in 2001. In the first quarter of this year, the bankruptcy situation seems to have improved a bit, with the number of petitions falling to 6,119. Credit card charge-offs have also shown signs of slackening off. The average charge-off ratio for the first two months of 2003 was down to about 11.3% - still not good, but an improvement on the final quarter of 2002. The question facing the banks is whether this can be sustained in the current environment. Apart from credit cards, asset quality has generally been benign. In particular, the all-important mortgage portfolio has held up well, with the three-month delinquency ratio standing at just over 1.1 %. This is despite the ominous rise in the number and amount of mortgages in negative equity. At end-2002, we estimated that there were around 78,000 cases of negative equity with a value of $ billion.