The interest rate reductions and the fall in the krone exchange rate imply that inflation will gradually increase and will be considerably higher than the current level as early as next spring. After such a period of very low inflation as we have now witnessed, it is appropriate to be particularly vigilant in monetary policy in the event that inflation does not increase as projected. We have little experience concerning the effects of such considerable monetary policy easing as that seen over the past year. It is uncertain how economic agents will adapt to a real interest rate that is as low as it is now. Activity in the Norwegian economy may pick up more swiftly than expected. Excess capacity may be reduced more rapidly and unemployment may fall to a greater extent than we have projected. If new pressures arise in the Norwegian economy, inflation may be higher than projected. Growth in household borrowing, which has slowed since spring 2002, may accelerate again. A renewed rise in house prices and the debt burden may provide the basis for new imbalances in the economy. On the other hand, growth in corporate borrowing has remained very low. The projections are based on the assumption that wage growth is primarily determined by overall conditions in the labour market. It cannot be ruled out, however, that profitability in internationally exposed industries will again play a more prominent role in wage formation than has been the case in recent years.
This is also an indication that changes in competitiveness over time depend on real economic factors and aspects of wage formation and cannot be controlled by monetary policy. Household demand will probably be the most important driving force in the Norwegian economy in the period ahead. Private consumption has a considerable impact on overall demand and activity and accounts for 60 per cent of mainland GDP. There are prospects of strong growth in private consumption. The interest rate reductions are contributing to strong growth in disposable income. When households’ interest-bearing debt is substantially larger than their interest-bearing assets, a fall in interest rates will reduce household interest expenses. The magnitude of this effect depends on the impact of the key rate on deposit and lending rates to households and on the proportion of the debt that is tied to floating rate loan agreements. If we base our assumptions on Norges Bank’s figures for household net lending for 2002, interest expenses could be reduced by NOK 12-15 billion on an annual basis. This corresponds to a rise in disposable income of just below 2 per cent. Because the fall in interest rates has occurred gradually through 2003, some of this effect will become evident in 2004 if interest rates remain low. Long-term interest rates are also historically low, enabling households to fix their borrowing rate for a few years at a level that is relatively low compared with the interest rate a few years ago.