I believe many of those present here have a special interest in developments in the exchange rate, and will therefore discuss this in more depth towards the end of the address. The economic situation and the orientation of monetary policy The Norwegian economy is now in a cyclical upturn. Over the past three years, mainland GDP has grown by approximately 4½ per cent annually, and the strong growth has continued in 2007. In the first half of the year, annualised growth was close to 6 per cent, and even if GDP growth in the third and fourth quarters should be zero, annual growth will be well over 4 per cent. As the chart shows, there have not been four consecutive years with such strong growth since 1971. At the same time, productivity growth in the Norwegian economy has been strong, and the supply of labour has been ample. The growth capacity of the economy has therefore been high. Low interest rates, growth in public demand and in petroleum investment and vigorous international growth have resulted in high income growth in the household and business sectors. Moreover, low interest rates have made it more profitable to bring forward consumption. In addition to contributing to the increase in actual income, the sharp improvement in the terms of trade may have raised households’ income expectations. On balance, this has boosted demand for goods and services. So far, there are few signs of a slowdown in the Norwegian economy.
Disturbances to the economy may result in changes in the forecasts. Data revisions imply that the current economic situation is  BIS Review 97/2007  3  not fully known. Our ambition must be to reduce uncertainty with regard to our own response pattern. That actual interest rate developments will deviate somewhat from the Bank's forecast will probably be the rule rather than the exception. What Norges Bank’s Executive Board actually adopts is a monetary policy strategy that applies until the next Report. When Monetary Policy Report 2/07 was presented in June, the Executive Board decided that the key policy rate should be in the interval 4½-5½ per cent in the period to the publication of the next Report on 31 October. And even that is conditional on economic developments that are broadly in line with projections. Financial market turbulence Global economic developments are important for economic developments in Norway, and changes in the growth prospects for the world economy may influence our projections. The turbulence in international financial markets in recent weeks has heightened the uncertainty concerning developments ahead. The source of the turbulence can be found in the US housing market and particularly in the subprime mortgage market. This segment of the US credit market has expanded sharply in recent years. The loans often feature an interest-only period and low interest rates in the first years of the loan's term and higher interest rates thereafter.