If there is a more rapid downswing than expected, the problems in the mortgage market may be more profound and spread to other sectors of the credit market. And of course the unrest in the financial markets can in turn contribute to a broader slowdown in the US economy. The situation remains uncertain and there is considerable sensitivity to new negative information and to other shocks. And there will probably be more bad news from the United States and Europe. We were all taken by surprise This autumn has seen a number of unpleasant surprises and, as I have said, there is reason to believe that the unrest will continue. The Riksbank, like most other central banks, had previously warned that there were difficulties in the credit market, particularly the low risk premiums. The situation we have seen was therefore not entirely unexpected. However, something that was underestimated was how quickly and by how much the price of risk rose, as well as how quickly problems in a distant part of the US credit market could spread throughout the world and have such a strong impact on the interbank market, which is the actual core of the international financial system. BIS Review 136/2007  5  To those wishing to learn more about the market turbulence, I can warmly recommend the Riksbank's Financial Stability Report, which will be published soon.
Disturbances to the economy may result in changes in the forecasts. Data revisions imply that the current economic situation is  BIS Review 97/2007  3  not fully known. Our ambition must be to reduce uncertainty with regard to our own response pattern. That actual interest rate developments will deviate somewhat from the Bank's forecast will probably be the rule rather than the exception. What Norges Bank’s Executive Board actually adopts is a monetary policy strategy that applies until the next Report. When Monetary Policy Report 2/07 was presented in June, the Executive Board decided that the key policy rate should be in the interval 4½-5½ per cent in the period to the publication of the next Report on 31 October. And even that is conditional on economic developments that are broadly in line with projections. Financial market turbulence Global economic developments are important for economic developments in Norway, and changes in the growth prospects for the world economy may influence our projections. The turbulence in international financial markets in recent weeks has heightened the uncertainty concerning developments ahead. The source of the turbulence can be found in the US housing market and particularly in the subprime mortgage market. This segment of the US credit market has expanded sharply in recent years. The loans often feature an interest-only period and low interest rates in the first years of the loan's term and higher interest rates thereafter.