This is reflected in a stronger króna than otherwise, which other things being equal delays the adjustment of the current account deficit. Nonetheless, it is impossible to demonstrate that monetary policy is impotent. Anecdotal evidence about households and businesses being squeezed by high interest rates confirms that the opposite is true. Monetary policy does work, and will eventually impact demand and thereby the current account deficit. Inflation soared in the recent term to peak at 8½% just after mid-2006, as I mentioned before. The Central Bank made a particularly sharp response to the deteriorating inflation outlook last year with a large hike in the policy rate on the back of sizeable earlier increases. There is no question that the tight monetary stance entailed by these measures reversed the development and drove inflation down, as subsequent data have shown. In its Monetary Bulletin published in July this year, the Central Bank forecast that inflation would be close to target in 2008 and it would be attained in full in 2009. Of course events are unfolding in this way as a result of the tight monetary stance and it is absurd to claim otherwise. It can even be argued that the Bank should be criticised instead for not raising rates enough and quickly  BIS Review 111/2007  3  enough. I am referring here to the shortcomings I mentioned in the transmission of policy rate hikes and insufficient restraint in other areas of the economy. A tighter Central Bank monetary stance makes borrowing more expensive.
Failing to support monetary policy in efforts to achieve the intended results would be an act of surrender and have dire consequences. 6  BIS Review 111/2007