Even though neither the changes nor amounts involved were large, there is little doubt that they had some effect and prompted a new marketing drive by the banks. In a climate of rapidly growing disposable income, house prices began to soar again. The Central Bank has emphasised the need to change the public sector mortgage credit system but has not stated an official view as to how this should be done. Nonetheless, immediate reforms are vital to give monetary policy more leverage over the mortgage loan market. Another important consideration is that whatever mortgage loan arrangements that are developed should provide a solid foundation for the domestic bond market. The Central Bank has been making these points for several years with little result. International agencies have agreed that a review of the role of the HFF is long overdue. Particular mention may be made of the IMF, most recently this summer. The Fund’s reports show that its analysts have striven to make an in-depth study of mortgage credit arrangements in Iceland. In its Article IV Consultation report published in June, the IMF claimed that a higher policy rate than otherwise had been needed as a result of the HFF’s activities. It should be added that one reason for the limited success in keeping the lid on inflation has been an enormous increase in disposable income in 2006 and 2007, driven by both wage rises and tax cuts. These factors and others have fuelled domestic demand and thereby inflationary pressures.
If the Central Bank had not maintained a tight monetary stance and not raised the policy rate as it has done, it is almost certain that the economy would be swept into a familiar spiral of inflation, currency depreciation and wage rises, benefitting no one but harming us all, as historical experience has taught us. One of the fiercest critics of Central Bank monetary policy has been the Confederation of Employers. They have dismissed the Bank’s monetary policy as having no effect, while claiming that inflation excluding the housing component of the CPI has been only 2½% for some time, and then infer that monetary policy has had no impact on that development, however they manage to reach that conclusion. The Confederation of Employers has suggested monetary policy reforms along the following broad lines: First, to relax the inflation target; second, to remove house prices from the target CPI; and third, to impose a corridor for Iceland’s policy rate differential with abroad, e.g. the European Central Bank. The Central Bank does not consider that any of these proposals would improve monetary policy implementation. On the contrary. Easing the inflation target is highly inadvisable. That would probably drive up inflation expectations of households and businesses and anchor inflation at a higher rate than would be tolerated in neighbouring economies, with correspondingly bad consequences. We should not set less ambitious goals than others. The Central Bank has previously declared its firm support for including house prices in the CPI on which the inflation target is based.