There has been an enormous increase in lending activity at a time when the nation is engaged in the largest investment it has ever undertaken, its financial system has been revolutionised, and the housing market has seen a virtually unparalleled injection of capital, to name just a few things. Neither can it be denied that competition has abated considerably, the market has become much more concentrated, and duopoly is common. It cannot be debated that effective competition in as many areas as possible is the main premise for the successful transmission of any central bank’s decisions into the economy. Managers of companies in the export sector have complained vociferously about the policy and activities of the Central Bank of Iceland. Their comments and criticisms are understandable, especially those coming from the fishing industry, which has had to stand up to the double blow of unfavourable exchange rates and an unavoidable cut in the cod quota. What has lightened the load for exporters, however, is that many of them, especially those in the aluminium and fishing sectors, can command high export prices at the moment. But while we must understand that exporters are dissatisfied with the current circumstances, it is not a given that their complaints are founded on the right premises. Many people consider the exchange rate of the króna disquietingly high and blame the Central Bank’s interest rate policy for it.
The problems we encountered in communicating monetary policy, which arose in conjunction with the substantial rate cuts during the second half of the 1990s, were also a significant reason for the Riksbank's decision in 1999 to publish a clarification of the formulation of policy and the application of the inflation target.1 Among other things the clarification specified the situations in which there may be reason to deviate from the simple rule of aiming policy at meeting the target of 2 per cent CPI inflation one to two years ahead. My discussion today is based on exactly the same line of reasoning as in that clarification. The second example is taken from spring 2001. Higher food and energy prices due to foot and mouth disease and mad cow disease, as well as supply shocks in energy production, caused a sharp rise in CPI inflation. The price increases were judged to be temporary, and the Riksbank decided therefore not to raise the repo rate. As the prices rises were estimated to disappear from CPI inflation relatively quickly, there was no need in this case to depart from the Bank's simple rule of monetary policy. However there was a need in our external communication to illustrate clearly the assessment that it was mainly transitory price increases that had caused CPI inflation to be so high above target.