The non-performing loan ratio has continued its downward trend despite the supply and demand shocks caused by the pandemic and stands at 11,2 percent as at June 2022, with total non-performing loans amounting to € which is the lowest level observed since 2014 when the definition was harmonised across the European Union. The current situation is therefore encouraging. But we should not fall into a complacency trap. Even though the banking sector exhibits significant reduction in NPLs, the progress has not been similar across the banking system with the smaller Banks lacking behind. Moreover, the risk of new defaults is increased in the current economic outlook. The elevated levels of inflation, in combination with the increasing interest rates, are expected to reduce net household income, which might ultimately hamper borrowers' repayment ability. The banking sector should continue to practice prudent policies and sensible risk management while being flexible to address the challenges that will arise. In a rather volatile period following two consecutive crises, it is vital that the banking sector adapt its business strategies to the new realities. This will be a challenging task as, it requires significant investment, cultural change and contribution of different stakeholders. Being mindful of time, I will focus on only three factors, which encompass the above challenges. 3/4  BIS - Central bankers' speeches  The first is transforming the banking business model towards technologically advanced services with digitization being the focus of this effort.
Looking further out, price inflation is projected to drift down further to a level notably below wage inflation. Chart 4 Policy rate raised from a very low level  The policy rate was cut to zero during the pandemic in order to cushion the downturn in the Norwegian economy. When we saw that economic conditions were normalising, we embarked on a gradual normalisation of the policy rate. But when the labour market tightened and the inflation outlook indicated that inflation might run above target for some time, it was appropriate to raise the policy rate faster in order to bring down inflation. Monetary policy is starting to have a tightening effect on the Norwegian economy. We do not know with certainty what the peak policy rate will be, but we believe we are approaching that level. This may imply a more gradual approach to policy rate setting ahead. Chart 5 A somewhat faster rate rise Our projections are based on a rise in the policy rate to around 3 percent in the course of winter. With this path for the policy rate, the interest rate on housing loans may move up to between 4 and 4½ percent. The reason the rate path is little changed since June, despite far higher-than-projected inflation, is that we are now seeing clear signs of a slowdown in the economy. Easing economic pressures will contribute to curbing inflation further out.