In a comparison of the profile in 2016 with the profile in 2005 and 2010, the most striking feature is that interest burdens rise in many age groups. The age profile itself is little changed. A similar chart showing the distribution of higher interest expenses across income deciles would have shown the same picture. Even though many households will feel the effects of higher interest expenses, the increase will be manageable for most people. The share of households with high debt relative to income, low debt-servicing capacity and a high loan-to-value ratio is small, and lower than just a few years ago (Norges Bank (2017)). Chart: Higher bank deposits dampen some of the effect of higher debt How quickly an interest rate increase will lead to lower growth in consumption also depends on the size of households’ financial buffers. Buffers in the form of bank savings can be drawn down if interest expenses rise, reducing the need to adjust consumption. Even though some households have little in the way of financial buffers, many households’ buffers are larger than just a few years ago. Despite the rise in debt ratios between 2010 and 2016, an interest rate increase will lay claim to a smaller share of bank deposits, particularly for the groups with the highest level of net debt. This will counteract some of the effect a higher level of debt has had on 6/7  BIS central bankers' speeches  the impact of an interest rate increase via the cash-flow channel.
Three-month Nibor is a so-called reference rate, used as a basis for the pricing of many financial contracts in Norway, such as loan contracts and interest rate swaps. In its capacity as a reference rate, Nibor is a key element linking the key policy rate with the interest rates facing households and enterprises. Chart: … and on to mortgage rates The interest rates paid by households and enterprises on their bank loans are set to cover banks’ costs as well as to provide a return on equity for the banks’ shareholders. A large share of banks’ costs consists of the cost of wholesale loans to fund retail lending. Prices for these loans will typically be formulated as a premium on top of three-month Nibor. Changes in Nibor will thereby affect banks’ funding costs and lending rates for households and enterprises. Reference rates are used to hedge against future changes in the general interest rate level. The pricing of bank bonds can serve as an example. When the interest rate on a bond is set at the reference rate plus a fixed risk premium, both the bank’s interest expenses and the bond purchaser’s interest income will depend on the level of the reference rate – and thereby on the general interest rate level. When the two parties agree to the contract, they can then focus on the contract’s specific conditions, such as the credit risk associated with the issuing bank. Internationally, Libor and Euribor are important reference rates.