For example, output growth could be hindered by a number of factors: a setback in global recovery, further delays in the energyintensive industrial projects that have been on the drawing board, or cutbacks in household consumption resulting from consumers’ deciding to save more and improve their net asset position more quickly than in the baseline scenario. The negative effects of the last of these will subside over time, however, and in a small, open economy like Iceland’s, the longterm effect should be positive. On the other hand, output could grow more than in the baseline forecast, particularly if risk premia on Icelandic financial assets decline significantly in the near future, foreign credit markets open up to Iceland again, foreign direct investment increases, and overall business investment becomes stronger. But these are big “ifs.” The roughly 3% output growth currently forecast for 2012 and 2013 is quite acceptable in the average economic climate. But projected growth for 2011 and 2012 is weak in view of the sizeable slack in the Icelandic economy. Furthermore, the foundations are not strong enough, as the contribution of external trade to output growth is negative and investment will be far below the historical average, even if it increases significantly from current levels. According to the forecast, exports of goods and services will increase by a scant 1% in 2011, followed by 2% annual growth in 2012 and 2013, even though the real exchange rate will be notably below its historical average throughout the period.
The court judgments and IMF review were  4  BIS Review 158/2010  in place by the MPC’s September meeting, however, and as a result, the substance of the September statement was different as regards the conditions for liberalisation. But it was conditions that had changed, not the policy. As the chart shows, developments in Government bond yields in August and September have a bubble like pattern that is often described as going down the stairs and coming up on the lift (or vice versa, if one considers price rather than yield). It is likely, then, that factors in addition to the MPC statements were at work here. These could include unusually large leveraged positions, the structure and effectiveness of the market, and a typical bubble phenomenon featuring extreme tension right before the bubble bursts. For its part, the Central Bank will investigate what happened and draw the appropriate lessons from it. But this could be useful for others as well. At all events, if market participants are interested in leveraged speculation on the duration of the capital controls, they are free to engage in it. But if they do, it is their choice and their responsibility. The removal of the capital controls is certainly further off than many observers thought earlier this fall, but a delay of several years is not in line with announced intentions.