Higher interest rates should help shift priority to the investment projects that are the most profitable and economical. This is the best way to foster increased productivity. The aftereffects of the 1970s - when inflation had finally been subdued - provide a good object lesson as well. Many companies had grown accustomed to negative real rates;  5/8  BIS - Central bankers' speeches  too many investments had been undertaken on the assumption that real rates were negative and would remain so. This led to a painful adjustment when inflation subsided and real rates turned positive, and many firms - even some large ones - folded as a result. All of this points in the same direction: it is of paramount importance to take the reins firmly and bring inflation down before it starts to distort the economy. Honoured guests: The Central Bank's interest rate hikes have caused a marked increase in monthly debt service on non-indexed, variable-rate loans. Furthermore, fixed-rate clauses on many borrowers' loan agreements will expire this coming winter. A decisive response is needed, but first we must diagnose the problem. To start with, it is clear that there are few casualties in the real estate market - as yet. Those who have financed home purchases with nominal-rate loans in the past three years have profited on higher property prices and negative real rates. At the same time, wages have risen significantly overall.
I suspect that societal discourse in Iceland has seldom been as destructive as it was then. I was born in 1970, and I remember well how inflation, the labour market, and the exchange rate dominated the radio and newspapers. I thought a lot about this inflation boogeyman that everyone was always talking about but no one could control. Actually, I was lucky enough to have price-indexed income: I owned two sheep - one multicoloured and one black. And some of the many agricultural pricing committees calculated the present value of the lambs and their wool, which I deposited to the Stykkishólmur co-op in line with inflation each year. On the other hand, money kept in banks and savings banks burned to a crisp under the white heat of negative real interest rates. At that time, interest rates, including Central Bank rates and commercial bank rates, were in principle set by political leaders. This led to real interest rates that were negative by 10 - 20% for quite some time. By 1979, negative real rates had scorched Icelanders' savings to the point where banking system deposits had shrunk 30 - 40% in real terms since the start of the decade. As a result, banks and savings banks had steadily less money to lend. Iceland's key economic sectors were in a state of continuous financial distress. Residential mortgages were in short supply. But perhaps it is incorrect to refer to "burning up" in this context.