We expressed our confidence in the convergence towards SAPI (a sustained adjustment in the path of inflation). Let me elaborate somewhat on the foundations of this confidence, looking first at economic data and forecasts and second at some principles of our monetary policy. Data and forecast In economics, it can be hard to know exactly where you are. Monthly and quarterly data can be quite jumpy and there are often multiple plausible hypotheses to explain them: measurement error; abnormal season effects; one-off effects like strikes or natural disasters; or a genuine change in the underlying economy. What happened to output in Q1 is a case in point. Was the slowdown from 0.7% real GDP growth in Q4 2017 to 0.4% in Q1 2018 mismeasurement errors across quarters? Unusually cold weather or a German influenza outbreak? A sign of concern about a potential trade conflict? Or a warning of a slowdown in underlying economic growth? The Governing Council judged that it was largely a moderation from the exceptionally strong growth of Q4 compounded by some temporary and supply-side factors at both the domestic and the global level, as well as weaker impetus from external trade.
Although the performance of a currency union should be evaluated rather in the light of price stability, which is the principal task of the area’s central banks (and where performance has been strong), than in the light of fiscal performance, which is the responsibility of individual member states, or financial stability, which – unfortunately – is still largely the province of individual member states, it is not unlikely that the problems facing the euro area will affect voters’ choices. The looming financial and sovereign debt crisis in the periphery of the euro area poses a problem for the conduct of the common monetary policy that must be solved. In the event that membership is rejected, it would be appropriate to consider other options. The measures I mentioned earlier could improve performance without radical changes. How successful they are will be determined to a large extent by the strength of political support for the reforms. For example, will those who consider the decisions of the independent Monetary Policy Committee “crazy” agree to place further tools at the disposal of the Central Bank or an independent financial stability committee? The combination of short-sightedness and populism that has long characterised economic and monetary discourse in Iceland is a roadblock to enhanced stability.