BIS Review 28/2007  7  The experience of previous business cycles has shown that wage and price inflation may increase markedly in a late phase of the upturn. Higher interest rates will counter such a development. However, we must also prevent inflation from becoming entrenched well below 2.5 per cent. We will therefore be mindful of the effects of higher interest rates on the krone exchange rate when inflation is low. Positive supply-side conditions that have held down inflation so far suggest a gradual approach, so that we can assess the effects of interest rate increases and other new information on economic developments. At the meeting on 15 March, Norges Bank’s Executive Board presented the interest rate path shown in the chart. The Board decided that the key policy rate should lie in the interval 4-5 per cent in the period to the publication of the next Monetary Policy Report on 27 June, conditional on economic developments that are broadly in line with projections. Furthermore, the key policy rate is expected to move up to about 5 per cent around the end of 2007. Economic developments are uncertain. The uncertainty surrounding the interest rate ahead is illustrated by the shaded area in the chart, which is intended to capture the outcome with a 70 per cent probability. Long-term interest rates, income growth and house prices Favourable economic developments in Norway have had an impact on developments in our property markets. House prices have risen sharply over the past 14 years.
It is higher than in Sweden and the UK, but lower than in Denmark and the Netherlands. Norway is among the countries with the highest share of owner-occupied dwellings, at around 80 per cent. This high proportion partly accounts for the high mortgage debt of households. In recent years, new loan products have also been launched, facilitating mortgage equity withdrawal. Housing wealth has become more liquid. Borrowers have greater scope for choosing repayment profiles. We cannot identify the exact level of household debt that can be sustained over time, but the rapid build-up of debt makes households more vulnerable. BIS Review 28/2007  11  Housing investment for the household sector as a whole is now being fully debt-financed, which means an increase in net debt. It would appear that household saving has fallen markedly in Norway in the recent past. Saving was negative in the latter half of 2006, which is the first time saving has fallen since 1988. The pronounced fall in saving indicates that households are taking greater chances. At the same time, government revenues and savings are high. The long period of prosperity and government budget surpluses may have engendered a sense of security which is also affecting household saving and house purchases. Petroleum and the Government Pension Fund – Global  High oil and gas production and high prices, combined with high returns, have resulted in a rapid rise in the value of the Government Pension Fund in recent years.