Inflation is higher in the euro area than in the US and approximately in line with the objective defined by the European Central Bank. In the euro area, however, capacity utilisation is very low, unemployment high and the outlook for growth is weaker. Against this background, it will probably also take time before interest rates rise markedly in the euro area. Chart 14. USD/EUR and the US current account balance as a percentage of GDP 0.8  0 USD/EUR (left-hand scale)  1  -2  1.2  -4 Current account balance (right-hand scale)  1.4 1999  2000  2001  2002  2003  -6 2004  Sources: OECD and Norges Bank  The imbalances in world trade represent a particular risk. The US is running a substantial trade deficit, which was financed for a number of years by private capital flows to the US business sector. The flows have subsided and led to a sharp fall in the US dollar at the same time as the euro has appreciated. Through purchases of US government securities, Asian countries have thus far kept their currencies stable against the US dollar. The US federal budget deficit is an important source of the imbalances in world trade. It appears that it will take time before the deficit is reduced to a considerable extent. This entails a risk that the dollar will depreciate further and that US long-term government bond yields will move up.
Per cent 25  December 2003  20  25 20  Household debt  15  15  10  10  5  5  0  0  -5  House prices  January 2004  -5 -10  -10 1983  1987  1991  1995  1999  2003  Sources: Norwegian Association of Real Estate Agents, Statistics Norway and Norges Bank  Home-owners who have seen the value of their dwellings rise have the possibility of taking up new mortgage-secured loans. They free up a portion of their home equity value to finance consumption and other investments. It is easiest to sell dwellings in the largest cities and some specific areas are particularly attractive. Residential property is now a fairly liquid and attractive investment. Price developments in the housing market are characterised by the fact that there is little change in the housing stock from one year to the next. As a result, higher demand for housing will in the first round translate into higher prices. Housing prices fluctuate more than prices for goods and services, where supply can be rapidly adapted. A persistently high rate of increase in house prices can in isolation engender expectations of a further rise and can thus prove to be self-reinforcing for a period. BIS Review 11/2004  17  Chart 26. Short-term interest rates in Norway Actual and market expectations.