The problems with inflation were then accentuated when the financial markets were deregulated. Prices and wages rose steeply and Sweden was caught in wage-price spirals. The occurrence of price bubbles made investment decisions more hazardous and led to weak productivity. A high level of inflation became a permanent feature of our economy. As monetary policy at that time was focused on maintaining a fixed exchange rate, fiscal policy ought to have been tighter. Bit by bit, there was a growing awareness across party political lines that in the longer run this economic policy strategy was not viable, a perception that had already dawned on most countries in our part of the world in the early 1980s. It was now that low inflation in Sweden came to be seen as a necessary condition for achieving stable and sustained growth and thereby high employment. This was clearly expressed officially for the first time in the Budget Statement in January 1991. Combating inflation was given pride of place on the economic policy agenda. The final policy objectives were the same as before but the perception of the conditions that were needed to attain them had changed. This realignment of stabilisation policy occurred, however, at a time when the earlier policy’s negative consequences had begun to leave their mark. Due to the high level of costs in manufacturing, for example, economic growth in Sweden was weak. In addition, a rising real interest rate coincided with a period when the tax reform made savers and investors more sensitive to interest rates.
The liberalisation of the capital controls is a collaborative project undertaken by the Central Bank and the Government, which actually means that elected representatives have the last word on the actions taken – particularly if and when tools are used that are not in the Bank’s toolbox. Honoured guests: I have spoken at some length on monetary policy and the labour market, on the one hand, and the capital controls, on the other. But I have done so with a purpose, as these are by far the greatest economic challenges facing us at the moment. Yet the Central Bank’s sphere of activity includes many other functions as well, not least those centring on the structure and stability of the financial system. Let us hope that, when we convene a year from now for the Central Bank of Iceland’s 55th Annual General Meeting, we will have resolved successfully the urgent issues now facing us and can turn our attentions to these other areas of activity. In the field of financial stability, emphasis has been on the risks related to the capital controls and on the formulation and implementation of the prudential rules that, in our opinion, must be in place once the controls are lifted. That work is well underway. And as regards risk assessment and contingency planning, the Systemic Risk Committee and the Financial Stability Council will be meeting next month, and the Central Bank’s Financial Stability report is scheduled for publication on 22 April.