Developments in debt in the 1990s may partly be interpreted as a delayed adaptation to the deregulation of the housing and credit markets in the 1980s after many households experienced financial difficulties following the relaxation. Household assets and debt and housing wealth have risen at a markedly faster pace than disposable income, and housing wealth has grown more than net debt from 1994 up to the present. The Norwegian economy has experienced both upturns and downturns since 1994, and activity is now approximately on a par with the level prevailing in 1994. These changes must therefore be regarded as structural changes. We have limited scope for restraining structural changes that occur when households increase their debt over several years to invest in housing and other property and assets. An interest rate that would  BIS Review 16/2004  5  effectively restrain these structural adjustments would also have an adverse impact on output and employment. The interest rate can be used to reduce credit demand. At present - with low interest rates abroad and a close link between domestic interest rates and the krone - a tighter monetary policy will restrain credit demand primarily because job security would be reduced. Household credit demand is closely linked to developments in the housing market. Home-owners who have seen the value of their dwellings rise have the possibility of taking up new mortgage-secured loans. They free up a portion of their home equity value to finance consumption and other investments.
In the past 12-18 months, developments in the interest rate differential between Norway and other countries appear to have had a particularly marked impact on our currency. Norwegian interest rates have been pushed down towards the level prevailing abroad. In 2003, the interest rate differential narrowed as a result of monetary policy easing. The interest rate has been reduced by 5¼ percentage points and is now approximately the same as among our trading partners. The krone has depreciated by about 6 per cent over the past year and the krone exchange rate, measured by the import-weighted index I-44, is now at the level prevailing in March 2002. This is approximately on a par with the average for the 1990s. In the past few days, the krone has appreciated again somewhat. In February, inflation stood at –0.1 per cent. Apart from some temporary, technical factors that together account for 3-4 tenths of a percentage point, three main factors have contributed to the substantial deviation from the inflation target: •  First, the global downturn had considerable implications for the impact of interest-rate setting in Norway, via the exchange rate for instance. •  Second, low external inflation and rapid shifts in the international division of labour has resulted in a fall in prices for imported goods and services. This also applies when these prices are measured in terms of what Norwegian importers pay in foreign currency.