In this connection, however, it can also be pointed out that the Euro lost more than one-quarter of its value against the US dollar from the beginning of 1999 until it bottomed out, and since that time has risen once more by just over one-fifth. The Central Bank is not unconcerned about the exchange rate, but has limited means of influencing its development, as has been explained. There is only so much the Bank can do to restrain currency fluctuations. A substantial lowering of interest rates could possibly force the exchange rate down somewhat, but this would mean sacrificing other and more important objectives for precious little gain. The joint declaration issued by the government and the Central Bank in March of 2001 states that the Bank will intervene in developments on the foreign exchange market through buying and selling foreign currency if it deems this to be necessary in order to achieve its inflation target, or if it is concerned that exchange rate fluctuations could threaten financial stability. There is no cause for so doing at present. As I mentioned, the primary objective of the Central Bank’s monetary policy is to foster price stability. Price stability is recognised to be a prerequisite for long-term economic growth and thus improved welfare. The Central Bank has lightened its monetary restraint substantially in recent months. In the course of ten months, the policy rate has been cut very significantly, resulting in a real policy rate which is lower now than it has been since 1996, as I mentioned.
In recent public discussion the claim has often been made that the exchange rate of the króna is far too high and that the Central Bank needs to take steps to bring it down again. The fact of the matter is that the Bank’s means of controlling the exchange rate are overestimated and the power of the market underestimated when the claim is made that the Central Bank can, through its actions, direct the króna to a specific level. The proposal has been made, for instance, that the Central Bank cut its interest rates substantially with the aim of lowering the exchange rate. In this context it should be pointed out that the Bank has cut its policy rate substantially, from 10.4% only a year ago (11.4% two years ago) to 5.3% at present. The Bank’s nominal policy rate has not been lower since 1994 and the real policy rate is at its lowest since 1996. The domestic and foreign interest rate differential has narrowed significantly. In addition, the Central Bank’s interest rate is now below the estimated equilibrium interest rate and thus has a stimulating effect on the economy. The impact of interest rate changes generally is only visible after a certain time lag, prompting one to conclude that the effect of the major decrease in interest rates during the past year has yet to be fully felt.