According to the Bank’s forecast, the near-term outlook is positive. GDP growth is projected to measure just under 3% this year and then rise to about 3½% in 2015 before tapering off again to 3% in 2016. This level of growth is expected to exceed that of potential output with the effect that a positive output gap might emerge, particularly in 2015. Other things being equal, this will contribute to higher inflation. GDP growth in 2014–2016 will be driven by domestic demand, both private consumption and investment, and the contribution from net trade will be negative for the entire period. As a consequence, the sizeable current account surplus we have seen in the recent term will shrink rapidly next year and give way to a small deficit in 2016. This is cause for concern in and of itself, and we hope that the forecast will not materialise, as Iceland needs to maintain a current account surplus in the next several years as it focuses on putting its external debt onto a stronger footing and building up domestically financed foreign reserves. Economic policy and economic incentives would then have to take into account the task of of improving the outlook for the current account balance. Inflation has been below the inflation target for nine consecutive months. This is the secondlongest such period since the inflation target was adopted in March 2001, the longest being a twelve-month period from November 2002 through October 2003.
Már Guðmundsson: Economic outlook, monetary policy, and credit ratings Speech by Mr Már Guðmundsson, Governor of the Central Bank of Iceland, at the Chamber of Commerce Monetary Policy Meeting, Reykjavik, 6 November 2014. *  *  *  Madame Chairman, honoured guests, The Iceland Chamber of Commerce has a long-standing tradition of holding a meeting like this one on economic developments and prospects and monetary policy. The meeting is held following the publication of the Central Bank’s autumn forecast and, in latter years, the Monetary Policy Committee’s interest rate decision. It often has an additional specific topic, and on this occasion, our hosts have expressed an interest in the outlook for credit ratings. I will touch on that towards the end of my talk today, but as I usually do, I will focus mainly on monetary policy and the current and future economic situation. The big picture regarding the economy is this: the recovery that began in Q2/2010 is now well enough advanced that the slack in the economy is almost fully absorbed. The domestic economy has seldom been as well balanced as it is now. There is internal equilibrium, in that inflation has been at or below target for nine months and output is close to capacity. And there is external equilibrium, in that we have had a sizeable current account surplus that covers net capital outflows with room to spare, as the Central Bank has bought foreign currency for a total of 95 b.kr., or 5% of GDP, so far this year.