Norwegian enterprises and households borrow primarily at variable rates. Loans with no form of fixed rate agreement account for over 80 per cent of the value of loans to the household and enterprise sector. The current interest rate level is very low. Long-term investments cannot be made based on the assumption that this interest rate level will persist. According to money market expectations, the interest rate will eventually stabilise at close to 5½ per cent. This interest rate, plus a premium for banks’ margins, provides a more realistic indication of the interest rate level that will apply over the loan’s life than the variable interest rates prevailing today. 4  BIS Review 66/2004  Growth in the Norwegian economy is now solid. It appears that growth will also be high in 2005. From 2006, growth is expected to slow gradually to, and eventually somewhat below, the level of growth in potential output. In Inflation Report 3/04, the output gap is projected to become clearly positive in the course of 2005 and to remain positive until the end of the projection period. Inflation is projected to show a marked increase over the next year. In the short run, the depreciation of the krone in 2003 will continue to exert upward pressure on imported consumer goods. We also assume that the pronounced fall in prices for some goods and services last autumn will to some extent be reversed. In the somewhat longer term, inflation will show a more gradual rise.
There are still expectations of an increase in international interest rates, but market participants have lowered their growth and interest rate expectations as a result of high oil prices. Growth in the Norwegian economy picked up during the second half of 2003. The low interest rate has contributed to strong growth in private consumption and housing investment. Activity has picked up in service industries and the construction sector. High petroleum investment, the global economic recovery and a weaker krone through 2003 have improved conditions for manufacturing. Profitability is improving for mainland enterprises. There are signs of renewed growth in investment in a number of industries. Imports have expanded markedly. Potential growth in the Norwegian economy is estimated to increase somewhat more than normal this year as a result of increased competition and rationalisation in many sectors. This will contribute to fairly high growth in the Norwegian economy without the emergence of constraints on the supply of labour or productive capital. The high rate of growth in output nevertheless implies that the output gap will approach zero towards the end of 2004. The output gap is a measure of the difference between the actual level of output and potential output. Developments in the output gap provide a basis for assessing cyclical developments and can thus shed light on domestic price and cost pressures in the economy. It is difficult to know how high capacity utilisation is at any given time.