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Foreign exchange market intervention and capital controls, followed by the special reserve requirement on capital inflows into the bond market and high-yielding deposits, insulated the exchange rate from the effects of volatile capital movements, allowing it to develop relatively unhindered and in line with underlying economic conditions. The advantages of a flexible exchange rate therefore prevailed, while the disadvantages were mitigated. This did not make for an uneventful journey, however, because even though the equilibrium exchange rate had clearly risen, it is always subject to considerable uncertainty at any given time, and the risk of overshooting was genuine. This risk may have materialised to some degree, but had the above-mentioned policy instruments not been applied, it would have materialised much more strongly,  1  with the associated risk of an abrupt correction later on, which could have had adverse consequences for economic and financial stability. This economic turning point stems from a turnaround in some of the factors that contributed to the upswing. The global economic situation is not as favourable to us. Terms of trade are deteriorating and not improving. The rise in tourist visits to Iceland has slowed markedly. Therefore, as compared with the last three years, growth in export revenues will ease considerably this year and in the years to come. GDP growth will be lower, as will the rise in our real income as a nation, no matter what we may decide about nominal pay increases in wage negotiations or about how we distribute such increases.