There are many signs that the Central Bank's interest rate rises are producing results in the form of less activity in the areas of the economy which are most sensitive to interest rates. Had the Central Bank not reacted in this way, it is quite certain that overheating of the economy would have produced a much higher rate of inflation than Iceland has known in recent years, with corresponding consequences for the economy. The Central Bank's tight monetary stance has been quite widely discussed in Iceland. Questions raised have included its impact on the current account deficit and whether monetary policy was actually achieving its set aims, given unrestricted access to foreign capital and the insensitivity of households and businesses to interest rate changes. The Central Bank has made special studies of the impact that interest rate rises have on the real exchange rate and current account deficit. Research suggests that, since 1996, the tighter monetary stance has led to a 2-3.5% appreciation of the real exchange rate. At the same, the real exchange rate appreciated by 10.5%. Studies also indicate that this appreciation in the real exchange rate caused the current account deficit to widen by 0.5-2% of GDP, but that it will shrink again in the course of time. Bearing in mind that last year's current account deficit was equivalent to 10% of GDP, rises in interest rates have clearly not had much impact on it. A wide range of other obvious factors are at work there.
Jean-Claude Trichet: Interview in Bild Interview with Mr Jean-Claude Trichet, President of the European Central Bank, in Bild, Germany, conducted by Mr Oliver Santen and published on 15 January 2011. *  *  *  Mr Trichet, in one word, how would you describe the state of the euro today? If you allow me two words: credible and stable. Will the euro crisis get worse this year? Let me be very clear: this is not a crisis of the euro. Rather, what we have is a crisis related to the public finances of a number of euro area countries. All governments have to put their finances in order, and above all those governments and countries which have lived well beyond their means in the past. How are the euro area countries ever to reduce the debt, now totalling € trillion? This year, the budget deficit in the euro area will be half as high as that in the United States or Japan. Virtually all advanced economies face acute fiscal problems. This is something that is often forgotten. That being said, this is no time for any complacency. Let me repeat: the ECB expects the governments in the euro area to make enormous efforts to bring down their debt. Some countries have to get their debt under control again. Can you understand that many Germans are afraid of inflation? The Germans are right to be fiercely against inflation. Inflation hurts in particular the poorest. Price stability is a precondition for growth.