Latest estimates from Statistics Iceland put the figure at 4%, which is somewhat higher than the Central Bank assumed in its updated macroeconomic forecast published earlier this month. Statistical evaluation of output growth in 2003 could still change when estimates are revised, which illustrates the uncertainty that surrounds recent and current economic developments and compounds the uncertainty about the future that monetary policy formulation always faces. Be that as it may, output growth was clearly robust and is explained above all by a rapid increase in national expenditure after two years of contraction. Private consumption growth also picked up and investment soared after a sharp recession, primarily due to the impact of the hydropower and aluminium projects that were launched during the year, along with investment in housing. An interesting comparison can be made between output growth in Iceland and other countries, especially the euro area which is often used as a frame of reference. Roughly speaking, from 1996 to 2001 growth in Iceland was two to three times higher than in the euro area. In 2002 the euro area performed better, but in 2003 growth was estimated at 0.8% in the euro area while it was 4% in Iceland. The difference is even more pronounced between Iceland and the largest euro countries, Germany, France and Italy, whose economies have been sluggish for several years. This large  BIS Review 18/2004  1  difference in growth explains much of the interest-rate differential that has prevailed between Iceland and that area.
Later in the year annual HICP inflation rates are expected to increase slightly while displaying some volatility. Looking further ahead, in 2011 inflation rates should remain moderate overall, benefiting from low domestic price pressures. Inflation expectations over the medium to longer term continue to be firmly anchored in line with the Governing Council’s aim of keeping inflation rates below, but close to, 2% over the medium term. This assessment is also reflected in the September 2010 ECB staff macroeconomic projections for the euro area, which foresee annual HICP inflation in a range between 1.5% and 1.7% for 2010 and between 1.2% and 2.2% for 2011. Compared with the Eurosystem staff macroeconomic projections of June 2010, the ranges have been revised slightly upwards, largely on account of higher commodity prices. Risks to the outlook for price developments are slightly tilted to the upside. They relate, in particular, to the evolution of energy and non-oil commodity prices. Furthermore, increases in indirect taxation and administered prices may be greater than currently expected, owing to the need for fiscal consolidation in the coming years. At the same time, risks to domestic price and cost developments are contained. Turning to the monetary analysis, the annual growth rate of M3 stood at 0.2% in July 2010, unchanged from June. The annual growth rate of loans to the private sector, which has been gradually increasing, rose further to 0.9%, but still remains relatively weak.