Inflation was much higher in Sweden than in other countries, which resulted in poorer competitiveness. Instead of examining the real problems in the way the economy functioned, Sweden gave in to the temptation to conduct a constantly expansionary policy combined with repeated devaluations of the krona. There were five devaluations between 1976 and 1982. The fixed exchange rate lost credibility and was put under enormous pressure. Following large currency flows and extreme interest rate hikes, the Riksbank was forced to abandon the fixed exchange rate system on 19 November 1992. Today the capital markets and capital flows are substantially larger than they were at the beginning of the 1990s. The gross turnover in portfolio flows in Sweden is around 25 times greater now than in 1990. The free movement of capital has made it increasingly difficult to maintain a fixed exchange rate. This is evidenced not only by our own financial and exchange rate crisis, but also crises in other parts of the world; the United Kingdom in 1992, the EU’s ERM system in 1993, Mexico in 1995, South East Asia in 1997, Russia in 1998, Brazil in 1999, Turkey in 2001 and Argentina in 2002. When it comes to exchange rate systems, the financial integration in the world economy appears to have in principle limited the alternatives to a floating exchange rate or to an irrevocably fixed rate, for instance through a monetary union or currency board. If we look back a few years, both alternatives appear to have worked relatively well.
The correction reflects the pace of housing construction, which has risen to a high level, at the same time as population growth has shown a marked fall. In addition, the requirements in the residential mortgage regulation were tightened on 1 January 2017. Nevertheless, so far the correction seems to be limited, and house prices have edged back up in recent months. Chart: Key policy rate The key policy rate has now been 0.5 percent for a good two years. The very low level of global interest rates has contributed to the low interest rate level in Norway. At the same time, the Executive Board’s assessment through 2017 and into 2018 has been that there is a continued need for an expansionary monetary policy. The projections for the key policy rate have gradually been revised up as the outlook for the Norwegian economy has improved. Economic activity is now approaching a normal level, and inflation is projected to move up in the period ahead. Our latest analyses, presented in March 2018, suggest that the key policy rate will most likely be raised after summer 2018. At the same time, the Executive Board has given weight to the consideration that uncertainty as to the effects of a higher interest rate suggests a cautious approach to interest rate setting. Chart: Consumer prices Looking at the wider picture, we can, 17 years after inflation targeting was formally introduced in Norway, draw the conclusion that the system has functioned well.