GDP slowed from rates of 3 to 4 per cent in recent years to between 1 and 1.5 per cent in the first half of this year. At the same time, since last year the krona has weakened around 15 per cent. These two forces have pulled the Riksbank’s inflation forecasts in slightly different directions at different times in the past year. Roughly speaking, with a given potential growth rate, inflation tends to be subdued when economic activity slackens, while a weak exchange rate pulls in the opposite direction and may lead to higher price increases: directly through rising import prices and indirectly by stimulating activity via export production. In addition, sudden exchange rate movements can affect inflation expectations. Here I should like to be precise and a little formal and say that it is neither the current economic situation nor the current exchange rate that constitutes the starting point for the Riksbank’s comprehensive inflation forecast and monetary policy. What we use instead is an assessment of the future economic situation and an opinion about the exchange rate’s future path. But if economic activity slackens suddenly and unexpectedly, it does tell us something about the strength of the cyclical path and the probable future course. The same applies to the exchange rate.
The Bank’s Financial Market Infrastructure report will be issued early in June, and much is happening in that arena with the renewal of payment systems and the impact of technological developments on banks and payment intermediation. Honoured guests: The legacies of the financial crisis have now by and large been dealt with. We are now embarking on a new period of capital account openness. This entails both opportunities and risks. We must seize the opportunities, analyse the risks, and take appropriate action. To the best of its ability, the Central Bank will contribute to this process where appropriate. In closing, I would like to thank the Supervisory Board and the Monetary Policy Committee for their work over the past year, and I wish to thank the Central Bank’s many colleagues and collaborators for their cooperation – not least the Prime Minister’s Office, the Ministry of Finance and Economic Affairs, and the Financial Supervisory Authority. I would also like to thank the financial institutions with which the Bank interacts for their cooperation. Furthermore, I would like to thank the Parliament of Iceland, particularly the Economics and Commerce Committee, for their collaboration. And last but certainly not least, I want to thank the staff of the Central Bank for a job well done over the past year. 8