The market for new dwellings was saturated. Real house prices did not revert to the 1899 level until the mid-1980s. The rise in house prices has been high in Norway in recent years, but not particularly high compared with other countries. We have limited scope for restraining structural changes that occur when households increase their debt over several years to invest in housing and other property and assets. An interest rate that would effectively restrain these structural adjustments would also have an adverse impact on economic activity. But households are more vulnerable when debt levels are high. Long periods of a sharp rise in asset prices and debt may give rise to instability in output and employment at a later stage. Debt developments also affect banks’ behaviour. A particular responsibility for monitoring developments in financial institutions has been assigned to Kredittilsynet (Financial Supervisory Authority of Norway), and we are happy to have a well-equipped supervisory authority in this field. In its forecasting of economic variables, Norges Bank uses a broad approach. Current statistics and impressions from Norges Bank regional network are important in assessing the current economic situation. In its forecasting, the Bank uses several macroeconomic models: one core model and a number of smaller models. There is, however, no mechanical relationship between the models the Bank uses and its forecasts. The Bank’s forecasts are based on a broad and varied range of information sources and include a substantial element of judgment.
Inflation is still being restrained by the fall in prices for imported consumer goods, increased competition in a number of markets and the current period of lower nominal pay increases. The trend in prices for consumer goods over the past two or three years is a result of favourable developments in the Norwegian and global economies. Low inflation is being accompanied by real income growth and a rise in production. It cannot be ruled out that small open economies are particularly vulnerable to fluctuations in international prices. Deviations from the inflation target in Norway are broadly in line with Sweden and New Zealand, but are larger than for example in the UK and Canada. Developments in recent years have also been influenced by the fairly large favourable disturbances to which the Norwegian economy has been exposed. Developments in Norway’s terms of trade provide an illustration of this here. As consumers, we enjoy the benefits of falling prices for many imported goods. As a nation, we benefit from a fall in prices for the goods we import in relation to prices for the goods we export. Norway’s terms of trade are improving. The impact of the rise in oil and gas prices is particularly strong – and the domestic economy is shielded to a certain extent through the oil fund mechanism – but there have also been terms-of-trade gains in the mainland economy. The situation in Norway differs from that of our Nordic neighbours.