Macroeconomic balance will be difficult to achieve otherwise. An easing of the monetary stance now would simply be misguided and have unforeseeable consequences. The Central Bank would be failing in its mandatory duties if inflation were temporarily “let loose” to achieve supposed results in other areas. In the following speech I shall present arguments in support of this view. After maintaining a fixed exchange rate regime for more than a decade, Iceland adopted inflation targeting in March 2001 with a joint declaration by the Government and the Central Bank. The target is a twelve-month rate of increase of 2½% in the CPI. For much of the time the fixed exchange rate regime served its purpose, but towards the end, following the full deregulation of cross-border capital movements, more exchange rate flexibility was clearly required than the fixed regime could allow, even after the tolerance bands had progressively been widened from their original 2¼% to 9%, i.e. the króna was permitted to deviate by up to 9% from its central rate when the policy was abandoned. A return to a fixed exchange rate regime is out of the question. Since it could never be credible in practice, it can be ruled out – unless currency restrictions were to be reimposed, which is hardly on anyone’s agenda. Inflation targeting has proved a successful tool of monetary policy in many parts of the world. Well over two dozen central banks now target inflation, including those of various industrial countries such as the UK, Sweden, Norway, Australia and New Zealand.
That end is defined in article 5 of the National Bank Act as pursuing a monetary policy serving the interests of the country as a whole and ensuring price stability, while taking due account of the development of the economy. Article 6 is the basis of our independence. Under this clause, we are explicitly prohibited from seeking or accepting instructions from Federal authorities. In other words, we are obliged to make our own decisions. 1  For instance, a very well-known US congressman – possibly a future presidential candidate – has gone as far as calling for the Fed to be abolished. Cf. Paul, Ron (2009), End the Fed, New York: Hachette Book Group. BIS central bankers’ speeches  1  There are good reasons why Swiss legislators have established our independence so strongly. Theory and practical experience throughout the world are clear on this point. The more independent a central bank, the better it fulfils its mandate. It has much better chances of ensuring price stability and thereby making a contribution to sustained economic developments than a central bank that is not independent.2 I am not planning to overwhelm you now by citing all the relevant literature.3 However, the most important reasons put forward by academic writers on the subject include differences in the legitimation, time horizon and incentives of politicians and central bankers. While politicians are legitimated through popular election, central bankers legitimate themselves by carrying out their legal mandate to the best of their ability.