4  BIS Review 121/2008  unease has also more tangibly spread to European banks and government agencies in several countries have felt obliged to intervene. We have tried to take into account the effects of the financial crisis in our forecasts. But it is of course difficult to know to what extent we could have captured all the effects the crisis may have had so far on the real economy. Moreover, we cannot know how the financial crisis will develop in future and how long it will last. Falling house prices have affected not just the United States, but many other countries. We have not been affected by this, although there appears to be a cooling in the housing market here, too. Another shock that has occurred during this downturn is that energy and commodity prices have risen substantially. Last summer the oil price reached new top levels and inflation rose around the world. However, since then prices have fallen. Seen in a longer-term perspective, rising commodity prices are not an uncommon feature prior to a turnaround in the economic cycle. This was the case, for instance, in the 1970s. As a consequence of the rising inflation, central banks around the world have been faced with a difficult situation, where the risk of contagion effects on other prices and wages must be assessed in an uncertain economic situation with receding growth. Another common cyclical pattern that is now repeating itself is that labour productivity is low, which is significant for cost pressures.
But while we are at the bottom of the business cycle, it is appropriate that real interest rates should be well below long-term levels. Nonetheless, it is clear that, as interest rates fall, there will be less scope for further rate cuts. At present, however, I think we have not reached the bottom of the interest rate cycle. Let us turn now to the capital controls. When we begin to lift controls on capital outflows, sometime after March 2011, the exchange rate will lose the support the controls have provided. If all of the capital controls were lifted today, the exchange rate would probably fall sharply. But no such plan is in the offing. On the contrary: work will be done to create the conditions for removal of the controls without necessarily causing a marked drop in the exchange rate. The liberalisation strategy publicised in August 2009 specified three conditions for removal of the controls: 1) macroeconomic stability, including credible measures to ensure fiscal sustainability and declining inflation; 2) a sound financial system; 3) sufficient foreign exchange reserves. The financial system soundness requirement has not yet been met, but the other two are relatively well in place. But why were these conditions chosen? They were chosen because they are essential if risk premia on Icelandic financial assets are to fall to any significant degree.