Debt levels continue to fall, and the propensity to save is considerably stronger than has usually been the case during post-World War II upswings. This is probably due in part to greater caution in the wake of the financial crisis, but tight monetary policy has been a factor as well, by contributing to slower demand growth than would otherwise have been the case and by shifting a part of the steep rise in income and wealth towards saving. All of these factors have pulled together to create a better balanced economy than I have seen in my entire career. We have a handsome surplus on the current account of the balance of payments. Inflation has been below target for nearly three years in spite of large pay increases and strong demand growth. Positive supply shocks and the resulting currency inflows play a role here, and so does importation of labour. As a result, imported deflation and the appreciation of the króna have proven stronger than the inflationary pressures from the domestic labour market. Monetary policy has pulled in this direction as well, as I  1  mentioned, and in a historically important development, inflation expectations are close to target by most if not all measures. If this continues, monetary policy will have greater scope to mitigate the impact if positive developments give way to negative shocks.
Carry trade-related inflows into the bond market did cause some disruption of monetary policy transmission in summer 2015 and last winter and could have posed risks for financial stability further ahead. For this reason, and also to prevent the development of a new “overhang” following the offshore króna auction in June 2016, it was considered appropriate to take action to mitigate these inflows. Since then, they have largely stopped. However, there has been no let-up in foreign currency inflows in recent months, and by the end of last week, the Central Bank had bought foreign currency in the amount of 160 b.kr. since the beginning of July and the exchange rate had risen by nearly 12% over that same period. The available data indicate that foreign currency inflows are to a large extent related to the trade surplus, which has been quite large, owing partly to growth in tourism and positive terms of trade, plus foreign investors’ increased interest in direct investment in the Icelandic economy. The banks’ and other Icelandic firms’ improved access to foreign credit could play a role as well. On the other hand, speculative  7  flows related to the interest rate differential appear to account for only a small part of the inflows. Another important factor is that liberalisationrelated outflows are still limited. It should be noted, though, that balance of payments figures for Q3/2016 could change the picture somewhat, but they will not be available until the beginning of next month.