The Executive Board described the background for the decision as follows: •  Underlying inflation has been lower than projected in recent months. Nevertheless, several factors point to higher inflation ahead. Capacity utilisation is high and there is little spare capacity in the Norwegian economy. Employment is rapidly rising and unemployment has exhibited a marked decline. There are signs of higher wage growth and expectations of rising inflation. At the same time, the krone exchange rate has depreciated from strong values. •  The interest rate path presented in Inflation Report 3/06 will provide a reasonable balance between the objective of bringing up inflation towards target and the objective of stabilising developments in output and employment, conditional on the information currently available to Norges Bank. •  Monetary policy influences the economy with a lag. Over several years, interest rates have been considerably lower than what Norges Bank considers to be a neutral level. The interest rate may gradually be raised to a more normal level at a somewhat faster pace than envisaged earlier, although it is unlikely that rates will be raised at every monetary policy meeting. Based on Norges Bank’s current assessment, the interest rate will thus continue to be raised in small, not too frequent steps if economic developments are broadly in line with projections.
Housing investment is expected to grow through this year, albeit less rapidly than last year. Housing investment growth will thereafter moderate further, and may fall somewhat towards the end of the projection period. House price inflation is expected to slow. 2  BIS Review 108/2006  Household indebtedness has increased in tandem with high activity in the housing market. Growth in household debt (C2) has abated somewhat in recent months, but remains at a high level. Higher interest rates and lower house price inflation will curb growth in household debt in the next few years. Intensified competition and adaptation to new capital adequacy rules in the financial sector have squeezed banks’ lending margins. This may have curbed the impact of higher policy rates on house price inflation. Growth in credit to mainland enterprises has also shown a sharp increase over the past year, partly reflecting increased fixed investment. With prospects of continued high capacity utilisation in the Norwegian economy, solid profitability, ample liquidity and a high level of optimism among enterprises, strong growth in investment is expected again this year. As economic growth gradually slows, investment growth is also expected to moderate. Property management companies account for nearly 40 per cent of banks’ lending to the corporate sector. Activity in the commercial property market reached a very high level in 2005. The vacancy rate in Oslo has diminished steadily for two consecutive years and stood at 8 per cent in January 2006.