It is not yet possible to state with certainty that financial institutions could fund themselves without the support of capital controls and the declaration of a blanket deposit guarantee. In this context, it is critical to enhance the functioning of the financial markets, which are important for trading, funding, and risk diversification – particularly the foreign exchange and equity markets. It is also essential that financial institutions and other entities re-establish their access to foreign credit markets. A further task is to formulate policy regarding the nature, size, and international relations of the Icelandic financial system. It is no less important to formulate policy concerning the tools and institutional structure for financial stability: the financial crisis has taught us that assessing systemic risk is key, as are sound arrangements for the application of tools to mitigate it. The final crossroads is faced by economic policy, as a result of the changes I have described. In short, it can be said that the tasks at hand are shifting from the achievement of stability to promoting growth, and from crisis management to longer-term development. In terms of monetary policy, this can be seen in the Monetary Policy Committee’s shift of its bias from monetary easing to neutral. This does not mean that interest rates cannot be lowered further, but it does mean that because inflation appears to have hit bottom, economic recovery has begun, and the effective policy rate is closer to equilibrium than before, it is not as clear what direction upcoming interest rate decisions will take.
Már Guðmundsson: Iceland’s economy and monetary regime – a series of crossroads Speech by Mr Már Guðmundsson, Governor of the Central Bank of Iceland, at the 50th Annual General Meeting of the Central Bank of Iceland, Reykjavík, 7 April 2011. *  *  *  Honourable President; Prime Minister; other Ministers; Speaker of Parliament; Chairman of the Board; Party Chairmen, Bank Directors; Directors of Public Institutions; Ladies and Gentlemen: This year’s Annual General Meeting of the Central Bank of Iceland is held on the Bank’s 50th anniversary. But it would hardly be accurate to say that the Bank is facing halcyon days at this milestone. Quite the contrary: times are turbulent. Furthermore, Iceland’s economy and monetary regime are standing at a complex series of crossroads, and the paths we choose could have a profound impact on future developments. This is reminiscent of the situation that reigned when the Bank was founded, but I will come to that later. What exactly are these crossroads, then? The first fork in the road lies in the changing economic situation. Instability and recession are giving way to better equilibrium and recovery. The current account deficit from Iceland’s overheating period has been turned around to an underlying surplus that has supported the króna, which is now over 7½% stronger than it was at the beginning of last year. At the same time, the Central Bank has bought foreign currency in the market for about 33 b.kr., as part of its plan to accumulate non-borrowed reserves.