At the beginning of the decade, we learned that it can be demanding to strike a balance between different monetary policy considerations in a small, open economy. When the key policy rate is raised to restrain a pronounced rise in domestic cost inflation, it can have a strong impact on the krone exchange rate, as observed in 2002–2003. This influences both the real economy and the inflation outlook. Midway through the decade, inflation rapidly declined. China’s entry into world trade and increased imports to Norway from Asia led to a persistent fall in prices for many goods. The combination of low inflation and strong economic growth posed a challenge to the conduct of monetary policy. Interest rates – both at home and abroad – were set at low levels. At the same time, this amplified the cyclical upturn in Norway. Towards the end of the decade, during the financial crisis, the interest rate was reduced sharply and to record-low levels. The decision to lower interest rates was undoubtedly not a difficult decision to make at the time. A persistently low interest rate, on the other hand, can pose a challenge to financial stability in an economy where there is a strong willingness to borrow and property prices are rising. Despite challenges met over the past decade, inflation has been fairly stable and close to the target, which shows that monetary policy has been effective. Compared with the 1980s, for example, inflation has been considerably lower and growth in the mainland economy has been markedly higher.
In this way, the guidelines reconcile the need for a flexible approach  6  BIS central bankers’ speeches  to macroeconomic management with the gains brought by a commitment to more long-term operational objectives. Lessons from the financial crisis Even though Norway has fared well through the financial crisis, helped by a sound economic policy framework, some concerns related to financial stability remain. In particular, there is one area in which Norway differs from other countries in a manner we perhaps do not like: Norwegian households are among the most heavily indebted in Europe. As activity in the Norwegian economy is gathering momentum, pressures are mounting in the housing market. Consumer confidence has improved and house prices have risen in recent months. Housing starts are moving up, although from moderate levels. BIS central bankers’ speeches  7  So far, the low interest rate level has not led to a pronounced increase in household borrowing. However, the household debt burden is at a historically high level and is expected to increase further. Rising debt and property prices are mutually reinforcing phenomena. Higher asset prices lead to higher collateral values for loans and increased borrowing opportunities for buyers. This increases the overall risk of the financial system. While monetary policy and fiscal policy have been anchored within a long-term, operational framework over the past ten years, there has been no coherent regulatory system for financial markets. Requirements are currently imposed on individual banks, but without adequate regard to overall risk in the financial system.