From all the above it is clear that the Central Bank of Iceland has undertaken the major responsibility of ensuring price stability, which in the sense used in the joint declaration by the Government and Central Bank means a twelve-month rise in the CPI of 2½%. It is not the Central Bank’s role to ensure a specific rate of growth or level of employment, since its instruments are incapable of having any impact on them in the long run. However, it is acknowledged that ensuring price stability creates vital preconditions for economic growth and prosperity. Inflation increased substantially this year and in June it passed outside the tolerance limits as defined in the March declaration. According to the Central Bank’s inflation forecast published in early August, the outlook that inflation would rapidly decelerate towards the end of this year and the beginning of the next, then would move inside the tolerance limits in the middle of next year, and the 2½% target would be reached in mid-2003. The forecast was based on the main assumptions of an unchanged exchange rate from the forecast day, a cooling of the economy and no wage rises in excess of agreements that had already been negotiated. The Central Bank will publish its next inflation forecast on November 8. Tight monetary stance The Central Bank has applied a tight monetary stance for some time now, as reflected in its high policy interest rate.
Under the new monetary framework, the Central Bank of Iceland has been  4  BIS Review 95/2001  provided with the same mechanisms as central banks in most industrialised countries for creating such an environment. The Central Bank takes this role seriously and will strive to fulfil the conditions laid down by the new legislation and in the joint declaration which it issued with the Government on March 27. The global economic climate has been dramatically transformed in recent years and is still changing in the wake of the terrorist attacks on the USA on September 11. It is quite obvious that we in Iceland do not carry much weight in global economic terms. However, the situation in our immediate environment, especially among our main trading partner countries, is crucial to us. At the moment we are having a somewhat stormy ride. In this new environment, the role of everyone involved in economic policy-making in Iceland will be to act in a disciplined and responsible fashion. Doing so will be the main way to contribute to economic growth and prosperity in Iceland. BIS Review 95/2001  5