The government’s update of the stability programme published this week rightly provides for such a control of public expenditure once the recovery is firmly established (0.7% growth per year from 2023 on average), although this is somewhat higher than 0.5% per year, and incorporates a more  optimistic view on potential growth than our own forecast (1.35% vs. 1.1%). What is more important in this regard however is not the exact number but that the established targets are effectively met. The level to be fixed – and then respected –, is a matter for democratic debate, not for central banks. This is a demanding but attainable goal: many of our European neighbours have achieved it. ** In conclusion, the Covid crisis has completely warranted a very supportive fiscal policy. But the gradual exit from this crisis should be a crucial opportunity for us Europeans to respond to one core question: how to maintain the right use of the fiscal tool while ensuring the sustainability of our debt, in order to be able to finance our common social model for coming generations. Accommodative monetary policy obviously helps, but it cannot be taken for granted eternally. To draw an analogy from the sphere of climate change, we should avoid a « tragedy on the horizon ». Thomas Paine, an English-born political philosopher and citizen of the world, once said: “If there must be trouble, let it be in my day that my child may have peace.iii” This is exactly what we should aim at in the next decade.
The interest rate influences inflation indirectly via domestic demand for goods and services and via its effect on the exchange rate. When interest rates rise, it becomes more profitable for households to save, and consumption will therefore be postponed. Similarly, borrowing becomes more expensive, and investment will decline as a result. Lower demand then curbs the rise in prices and wages. Higher interest rates make it more attractive to invest in NOK and borrow in foreign currency. Therefore, higher interest rates normally lead to an appreciation of the krone. This makes imported goods cheaper. In addition, a stronger krone reduces activity, profitability and the ability to pay in the internationally exposed sector. Major economies such as the US, Germany and France are struggling with stagnation and fears of recession. Sluggish developments have led many countries to set very low interest rates in an attempt to stimulate growth. The business cycles in Norway and other countries have been desynchronised. While the turnaround abroad took place two years ago, the Norwegian economy continued to show a high level of activity. Towards the end of the upturn, the economy was facing labour shortages, higher wage growth and a sharp increase in household consumption and debt. Interest rates had to be kept at a high level in  BIS Review 23/2003  1  Norway. This led to a widening of the interest rate differential against other countries. The main explanation for the wide interest rate differential is that interest rates abroad are at a historically low level.