Davíð Oddsson: The Central Bank of Iceland’s commitment to price stability Speech by Mr Davíð Oddsson, Chairman of the Board of Governors of the Central Bank of Iceland, at a seminar organised by the Iceland Chamber of Commerce, Reykjavik, 5 December 2005. *  *  *  On December 2, 2005 the Central Bank of Iceland raised its policy interest rate by 0.25 percentage points before last weekend. I do not expect that decision came as a surprise. Some people may well have read into what the Bank wrote in connection with the policy rate hike in September that the increase this time would be greater, by 0.50 or even 0.75 percentage points. No such decisions were embodied in those writings, although the Bank made a clear commitment that it takes its mandatory role seriously and would not flinch at following it with full force. Those declarations stand firm. Monetary Bulletin, which was published on the Central Bank’s website last Friday, includes a detailed account of the Bank’s assessment of economic and monetary developments and prospects, and the arguments underpinning its decision to raise the policy interest rate now. The scenario that we faced on September 27 has changed in several ways. Uncertainty about wage settlements has been dispelled, although admittedly at considerable cost. The consumer price index fell somewhat at the last measurement. House price inflation has slowed down and there are signs that a turning point has been reached.
All markets should therefore stand open to Icelandic banks for the foreseeable future. However. it is not necessarily certain that these important preconditions will be the only factors at work at any given time. They do so while market conditions are normal but markets can be volatile, especially in a climate of global economic imbalances. The US economy is very buoyant and dynamic at present. This is to be welcomed. However, other signs are less encouraging: a low level of saving, a wide fiscal deficit and a current account deficit that repeatedly hits record levels. Europe has still not recovered and the recent rise in the ECB minimum lending rate has been harshly criticised by those concerned about stagnation and growing unemployment. All these aspects of our environment call for normal caution to be exercised, not least against the background of such rapidly growing and increasingly prominent forays by Icelandic financial institutions in the international capital markets. Under such conditions we can endorse the comment by my colleague, the Governor of the Central Bank of Denmark, who said a few days ago that it was just as important to observe the speed limit in economic policy as on the roads. Now I would like to allow myself a few words about housing issues.