This symmetry means that both negative and positive deviations from the target are equally undesirable. The ECB too points out that the marked decline in the equilibrium real interest rate has meant that the effective lower bound for nominal interest rates is likely to limit monetary policy more often. It also emphasises that one consequence of this is that strong or sustained monetary policy measures are needed when the interest rate is close to the lower bound to avoid negative deviations from the inflation target becoming permanent. It also notes that the new strategy may mean that inflation periodically will be above the target, but, unlike the Federal Reserve, it has chosen not to introduce an average target.7  Mutual dependence We have thus seen that a prerequisite for fiscal policy and monetary policy to be effective is that they have a stable long-term foundation. For fiscal policy, there must be confidence that public debt is stable over the long term and, for monetary policy, there must be confidence that the central bank can keep inflation low and stable. In order for monetary policy to be able to use the policy rate to counteract economic downturns and increased unemployment, it is also necessary for average inflation not to be too low.
Required yields have now fallen again in the secondary market and so has pricing of Icelandic banks’ CDSs. The banks have also tapped international credit markets on favourable terms recently and have more than met their capital requirement so far this year. Their market position has therefore definitely improved again, which must be welcomed. The banks have vigorously expanded in other countries in recent years. Most indications are that their foreign investments have been successful, in the Central Bank of Iceland’s view. Their subsidiaries are sound financial companies subject to stringent supervision in their home countries, just like the parent companies in Iceland. Likewise, these companies operate in stable economies where the outlook is bright. At the end of 2005, two-thirds of the banks’ consolidated lending was to foreign borrowers. In effect, therefore, overseas expansion has strengthened the banks’ foundations. They are no longer so much at the mercy of economic fluctuations in Iceland or any other country. On the contrary, their risks are dispersed. Pension funds I shall now turn to the matters in which you are most directly involved, the position of pension funds in Iceland. Their position is remarkable in all respects, especially by international comparison. Most or all other industrial countries have rapidly ageing populations and face growing and serious fiscal concerns about future pension fund arrangements. Since their pension schemes are largely funded by taxation, a sharp rise in contributions is foreseeable over the next few decades.