Birgir Ísleifur Gunnarsson: Review of economic development in Iceland during 2002 Address by Mr Birgir Ísleifur Gunnarsson, Chairman of the Board of Governors of the Central Bank of Iceland, at the Bank’s annual meeting, Reykjavík, 21 March 2003. *  *  *  On behalf of the Board of Governors of the Central Bank of Iceland I welcome you all to the Bank’s nd 42 annual meeting. The Bank’s financial statements for the year 2002 have been ratified today by the Prime Minister. The Bank’s annual report has also been published. It includes a survey of the Bank’s activities and performance, along with a detailed report on the Bank’s monetary policy and actions, the financial system, financial stability and the financial markets, and the main features of economic developments in the course of last year. The year 2002 was the first full year after new legislation on the Bank was passed and it moved onto an inflation target with a joint declaration by the Government and the Central Bank in 2001. The number of countries that have adopted an inflation target for their monetary policy implementation has increased sharply after New Zealand introduced such a policy in February 1990. In all, 21 countries have now moved onto a formal inflation target, including Canada, the UK, Norway, Sweden, Switzerland and Australia. The chief characteristic of this arrangement is that price stability is the main objective of monetary policy.
But on this, we need to be clear that the strength of the dollar is a global phenomenon – not just a Malaysian one. In fact, the US dollar is now at a two decade high[1] due to aggressive tightening of monetary policy by the Federal Reserve which increased its policy rate by 300 bps this year. Risk-off sentiments arising from geopolitical conflict and a moderating global growth outlook have further increased demand for dollar assets. 14. Like most countries in the world and around this region, the ringgit has not been spared. The currencies of other major economies have also depreciated against the US dollar. If we also look at how the ringgit has fared against the currencies of our trading partners, it has appreciated against some and depreciated against others. In fact, the performance of the ringgit, if weighed against the currencies of Malaysia’s trading partners have been relatively stable. This underlines the point that we are in an environment of US dollar strength. 15. It is also important to emphasise that the ringgit’s performance against the US dollar alone is not a reflection of the state of the economy. The exchange rate is only one indicator among many. Like I said at the start, it is important to consider the strength and positive performance of the Malaysian economy. Growth is robust, the labour market is healthy and the financial system is resilient and continues to perform its role effectively.