Key policy rate is low because inflation is low and because the downturn abroad and a strong krone are dragging down on growth in some sectors in Norway. Very low interest rates abroad and high premiums in money and credit markets reinforce this picture. There are unusually wide differences between various interest rates, reflecting the high level of money  4  BIS central bankers’ speeches  market and credit premiums. Many households are paying up to 4 percent on housing loans and interest rates on corporate loans range between 5 and 6 percent. When setting interest rates, the Bank does not give weight exclusively to bringing inflation back to target. Weight is also given to the effects of the interest rate on output and employment. At the same time, weight is given to the risk that a prolonged period of low interest rates can lead to elevated risk-taking and excessive debt accumulation in the household and business sector. Such imbalances may have spillover effects further ahead, with substantial effects on output and employment. In the March 2012 Monetary Policy Report, Norges Bank clarified how these considerations are expressed in the Bank’s response pattern. In that connection, the Bank adjusted the criteria to which it gives weight in interest rate forecasting. The key policy rate is set so that inflation is brought back to target. At the same time, inflation targeting is flexible, which means that the path for inflation should be weighed against developments in output and employments. Interest rate setting should also be robust.
The United States is in one of the longest phases of rising GDP of the post-war period and, last year, the euro area had the highest growth in ten years. However, it takes time for the strong economic activity to affect inflation. Although the recovery has come far after the years of financial crises and low growth, wage increases have been unexpectedly low in many advanced economies. In large economies such as the United States, Canada, Germany, Australia, as well as in Sweden, unemployment is close to or below levels at which wage growth, historically speaking, tends to pick up. In Sweden, we have had a number of years with a combination of low productivity and low expectations of inflation and wages, which partly explains the low wage demands up to now. Even if Sweden has had a strong employment trend in recent years, technological innovations and international competition will entail a transformation in which jobs will disappear and need to be replaced by new ones. These forces, in combination with long-term stagnation in the euro area after the financial crisis, are also leading to employees becoming more cautious with their demands. 3 It is feasible that the upheaval these forces cause at workplaces may also make it difficult for individuals to assess whether they risk becoming unemployed and, if so, what their position might be on the labour market. Low wage expectations are a global phenomenon and can contribute towards those already in employment becoming less interested in looking for a better-paid job.