The stage was therefore set for the floodgates to open and private consumption to come gushing back as soon as public health measures were lifted early in 2022 and consumers had an opportunity to exercise their purchasing power. The objective of all economic policy is to maintain equilibrium in the domestic economy, to ensure that there is "neither too little nor too much", to paraphrase Thorbjørn Egner's When the Robbers Came to Cardamom Town. During the pandemic, economic policy leaders had to take on the biggest contraction in output since the end of World War II, followed by an abrupt turnaround and a torrent of demand together with an unexpected jump in import prices. The first half of the job keeping the economy up and running during a deep downturn - went well. But the second half - restoring equilibrium after the pandemic - is turning out far trickier. The surge in inflation that followed the pandemic took the world's central banks by surprise. Early on, there was talk of a temporary adjustment - inflation would evaporate, and quickly, too. That proved to be wishful thinking. On that front, Russia's invasion of Ukraine - with the associated surge in commodity, fuel, and food prices and disruption of supply chains - had a serious impact. The unfortunate fact is that inflation has hit double-digit levels in many parts of Europe. Every central bank on the continent is still in a monetary tightening phase.
We live in a small open economy and are forced to import inflation through our purchases of necessities from abroad. Because of this, we must trust that our trading partners will take decisive action to bring inflation down within their own borders. Iceland is now reaping the rewards of the ironbound policy formulated during its reconstruction following the 2008 financial crisis - a policy that insisted on a secure financial system with strong lines of defence against external instability. Icelandic banks have extraordinarily strong capital in historical and international context, and they are under close financial supervision. Moreover, the news from abroad confirms that merging the Central Bank and the Financial Supervisory Authority back together at the beginning of 2020 was the right decision. The merger and, in particular, the increased power the Bank has been granted in the area of financial stability have been of vital importance in ensuring that the current fluctuations in demand, interest rates, and financial conditions do not give rise to a credit bubble or excessive risk-taking in the financial sector. Iceland carries very little household, corporate, or government debt in comparison with other countries. It is clear that these conditions provide monetary policy with full flexibility to act. There are no handcuffs here. Honoured guests: I don't know whether any of you have gotten lost in the fog, found yourselves going around in circles, and been convinced that water flows upstream. I have never gotten lost in the Icelandic outback, but I have often done so in foreign megacities.