While the capital controls are being removed, the risk-adjusted interest rate differential between Iceland and its trading partners must be sufficient to make ISK assets attractive relative to foreign currency alternatives. On the other hand, there are strong arguments for a considerable reduction in interest rates, provided that the capital controls keep the króna stable. Whether the interest rate at any given time is appropriate depends in part on the timing of the phased capital account liberalisation. Both the market and the Monetary Policy Committee face uncertainty about when, and in what stages, it will be possible to lift the controls. In line with transparent monetary policy implementation, the Monetary Policy Committee has explained how this uncertainty affects its decisions. To that end, the Committee has given an account of various factors that affect the prospects of continuing the phased capital account liberalisation that began in November 2009. Uncertainty about key Supreme Court decisions and the third IMF review increased the likelihood that the next stage of liberalisation could be delayed quite a while. The bond market appeared to interpret this delay to be more fundamental in nature than the Monetary Policy Committee intended to convey in its statement, thus contributing to the decline in yields that had begun somewhat earlier. The uncertainty had abated by the time the Monetary Policy Committee met in September, and the Committee explained this in its statement. Furthermore, the Committee implied that it would inevitably consider this point in its next interest rate decisions.
I have given my views on the current monetary policy situation and described the principles that guide monetary policy. I have also mentioned some of the practical problems we face. When it comes to the current monetary policy situation, my assessment is that the picture we painted of inflation prospects in the February Inflation Report still holds true to a great extent, although it now looks as though energy prices may contribute to higher inflation in the short term. Monetary policy needs to become less expansionary. With regard to the monetary policy strategy, one important message has been that we do not always aim to bring inflation back on target as quickly as possible; we also give consideration to the real economy. We cannot rule out the possibility of situations arising where it may be necessary to set our sights further ahead than the time period normally used to guide monetary policy decisions. However, in this case we will make it clear in advance that we envisage such a development. Thank you! BIS Review 44/2006  5