Near-term developments in nominal and real interest rate will be determined by economic developments and the inflation outlook. The MPC attempts at all times to keep interest rates no higher than they must be in order to hold inflation at target over the medium term. Based on these considerations and assuming that there are no major unforeseen changes in the current situation, the scope for further reductions in nominal interest rates could develop in the near future. The Government has initiated a review of the monetary policy framework. The Central Bank of Iceland supports this process and will participate actively in it. It is important both to take into account what monetary policy can achieve and to acknowledge what it cannot do. It is also important to bear in mind that significant changes have already been made in monetary policy conduct since the pre-crisis period, as I have discussed in detail in this setting in the past. Nevertheless, various additional changes need to be considered, and the Central Bank cannot change the most important element of the equation: that monetary policy, fiscal policy, other economic policy, and decisions taken in the labour market must pull together to the maximum extent possible. I would also like to emphasise the importance of preserving the monetary policy achievements that I have discussed. 6  Honoured guests: The Central Bank’s foreign exchange reserves totalled over 810 b.kr. or 7½ billion US dollars, at the end of February. This is equivalent to about one-third of GDP.
In this context, it gives cause for concern that the fiscal stance in terms of the cyclically adjusted primary balance has eased over the past two years and appears likely to do so again this year. It is also possible to address the currency appreciation at its source by applying what some representatives of the tourism sector have appropriately referred to as “access restrictions and pricing”. In the recent past, numerous observers have expressed the opinion that the Central Bank’s key interest rate is too high under current conditions. As grounds for their arguments, they cite much lower interest rates in trading partner countries, the fact that inflation in Iceland has been at or below target for three years, and the Central Bank’s overforecast of inflation in recent years. Discussing whether the monetary stance is in line with the Bank’s objectives and current economic developments and prospects is normal and appropriate. Opinion varies, sometimes even within the Monetary Policy Committee itself, because reliable data on current and recent developments become available with a time lag and the future is always uncertain. 5  The Bank’s key nominal interest rate is now 5%, and the corresponding real rate is about 2½%. In view of the business cycle position and the fact that inflation is below target, this implies an equilibrium real rate of 1½%, which must be considered low, given that long-run growth potential is significantly higher. Current nominal and real interest rates are not high in historical terms, although they are high in current international context.