As Iceland's growth period progressed, symptoms emerged of the economic overheating which has been one of the main concerns of the Central Bank in the implementation of monetary policy in recent years. For the Icelandic economy, the period from 1990-1995 was one of stagnation, apart from 1994 when growth shot up to 4.5%, only to fall back to virtually zero the following year. In 1996, however, the growth phase began which we have been enjoying ever since. Over this period, the entire output gap that was present then was closed, and more besides. National expenditure has been growing at a faster rate than national income, resulting in a large current account deficit. National expenditure rose by more in 2000 than the preceding year, so the current account continued to widen. GDP growth was less than the year before, although it did not slow down sufficiently to ease output pressure. In all likelihood, the overheating that has characterised the Icelandic economy in recent years peaked in 2000, since there were indications of a slowdown in domestic demand growth in the course of the year, although it remained very strong. The outlook is for a substantial reduction in the rate of economic growth in 2001. Clear signs of overheating were seen in the labour market. Seasonally adjusted unemployment decreased from 1.5% in January 2000 to 1.2% in July, then remained unchanged to the end of the year.
In weighing up this decision, interest rate reductions among some of Iceland's trading countries in recent months have also been taken into account. Exchange rate To reiterate, the main objective of monetary policy is price stability. Since the exchange rate is an important determinant of prices, exchange rate stability has been an intermediate objective of monetary policy. During the first four months of last year the króna appreciated somewhat, but this trend was reversed in the middle of June and the currency was under pressure for most of the time until the end of the year. It depreciated by almost 9% from the end of 1999 to the end of 2000. To some extent the depreciation was triggered by fishing quota cutbacks and the resulting deterioration in the economic outlook. Demand for foreign exchange also outstripped supply because of last year's current account deficit, which is estimated at ISK 68.9 billion, as well as heavy investment by Icelanders in foreign securities amounting to almost ISK 40 billion net. Pension funds play the leading role in these investments. By the end of 2000, the real exchange rate of the króna had fallen below its average for the past twenty years. Actions in the foreign exchange market Under the prevailing circumstances, the Central Bank considered it necessary to take action to counter the depreciation of the króna. Besides raising its interest rates, the Bank intervened in foreign exchange markets thirteen times after the middle of 2000 in order to cushion against sharp fluctuations.