Through 2003, the interest rate differential has narrowed as a result of monetary policy easing. This has also contributed to a substantial depreciation of the krone. In Norway, internationally oriented business sectors, such as the ICT sector and the travel industry, have been particularly affected by weak global developments. Expectations concerning future earnings have been revised downwards substantially in these sectors. This has led to cost cuts and  2  BIS Review 43/2003  redundancies. Combined with a deterioration in competitiveness and lower activity in manufacturing, this has resulted in rising unemployment in the last year. Public agencies have had limited opportunities to increase service production because wages have risen. Some municipalities and other government agencies have reduced the number of employees. While real economic activity has declined and unemployment has increased, inflation in Norway is now low. The rise in consumer prices adjusted for taxes and excluding energy products (CPI-ATE) has slowed, primarily due to developments in prices for imported consumer goods. Low inflation is a consequence of the appreciation of the krone throughout last year and low inflation abroad. The rise in prices for domestically produced goods and services has also slowed. This particularly applies to prices for domestically produced goods influenced by world market prices. In August, the year-on-year rise in the CPI-ATE was 0.9 per cent, after having been down to 0.7 per cent one month earlier. This was slightly lower than projected in the last Inflation Report and considerably lower than the inflation target of 2.5 per cent.
As regards interest rates, both real and nominal rates have fallen continuously since the mid 1990s. For households this has entailed significantly lower mortgage costs. At the end of 1992 the banks' average nominal lending rate to households was just over 15 per cent and inflation stood at just over 2 per cent. Now, the average lending rate is around 6 per cent, while inflation has remained at about the same level. So households can incur more than double the amount of debt today and still have lower debt-servicing costs. The favourable economic climate from the mid 1990s also contributed to a drop in unemployment, on the one hand, and an increase in wages on the other. All in all, this led to a rise in household disposable income. Moreover, disposable income has continued to increase during the period of relatively weak economic activity in recent years. This has been mainly due to unemployment remaining low, in spite of the economic slowdown. So low interest rates and high growth in household disposable income are two fundamental factors that could explain the rise in prices in the housing market. Furthermore, there is no excess supply in the housing market similar to that seen at the beginning of the 1990s when housing construction was encouraged through various kinds of grants and tax subsidies. Instead, there is very little construction of housing today, and discussions are concerned rather with how to step this up.