In autumn 2012 we expect an interest rate of close to 3½ per cent, while market participants expect an interest rate of around 2¾ per cent 3. The deviation is considerable, but not exceptionally large. Our interest rate forecast seems to have the greatest effect on market interest rates in the year ahead. The difference is greater slightly further out. Differences may indicate that the central bank and market participants at times have divergent views regarding developments in the Norwegian economy. How does the market react to the publication of the interest rate forecast? For example, market participants may believe that a higher interest rate level in Norway than in other countries will result in a stronger krone exchange rate because it may be profitable to invest in Norwegian kroner and borrow in other currencies. Our projections are based on the assumption that the exchange rate will over time adjust so that the return on investments in Norwegian kroner will be the same as the return on investments in foreign currency – the so-called uncovered interest rate parity assumption. A positive interest rate differential will then reflect that the krone is expected to depreciate over time. At the same time, we seek to take account of the fact that risk premiums on investments in Norwegian kroner may vary over time. The interest rate forecasts have been useful – and it is an advantage, not a weakness, that the uncertainty surrounding the forecasts is well known.
Private sector credit growth has averaged less than 3% in the UK, US and the euro area over the past decade, generally less than nominal GDP growth. Aggregate debt servicing ratios are below historic averages, in part due to low equilibrium interest rates. Although there are pockets of risk, heat maps that mechanically bring together several credit measures remain relatively cool overall (Chart 7) – though aggregates can hide important pockets of risk that can amplify negative shocks, and, as I’ll discuss, it is a different picture for China. See Reinhart, C, Rogoff, K, (2010), Growth in a Time of Debt, American Economic Review. For example, see Bridges, J, Jackson, C, McGregor, D (2017) Down in the slumps: the role of credit in five decades of recessions, Bank of England Staff Working Paper N. 659; Borio, C, Drehmann, M, Xia, D (2018) The financial cycle and recession risk, BIS quarterly review; Taylor, A, Schularick, M (2012) Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870-2008, American Economic Review; Aikman, D, Bridges, J, Kashyap, A, Siegart, C (2018) Would macroprudential regulation have prevented the last crisis?, Bank of England Staff Working Paper N. 747. 15 There are various definitions of a credit boom in the empirical literature – for a brief summary see Gorton, G, Ordoñez, G (2019), Good Booms, Bad Booms, forthcoming in the Journal of the European Economic Association.