One of the standard assumptions behind the forecast is an unchanged exchange rate from the forecasting day, and it should be borne in mind that it did not take into account the interest rate cut which was announced on February 10. The impact of the cut will be a marginally higher rate of inflation than was assumed in the forecast. It should also be mentioned that Monetary Bulletin contains an announcement about pending changes to rules on required reserves aimed at harmonising the operating conditions of Icelandic credit institutions with those of comparable institutions in EMU. To be implemented in phases this year, the new rules involve a considerable reduction in the credit institutions’ required reserve from the present levels, thus entailing some easing of the monetary stance. Broadly speaking, the Central Bank’s assessment and forecasts entail a fairly moderate rate of economic growth this year, unemployment of around 3½% this year (excluding the effects of new government measures in this area) but falling somewhat next year, a minor current account deficit this year and next year – in particular caused by imports connected with the construction programmes in east Iceland – and a very moderate rate of inflation. Thus it can be said that the outlook is for good macroeconomic balance. As I mentioned earlier, Monetary Bulletin includes an in-depth assessment by the Bank of the proposed power-intensive industrial projects in east Iceland and conceivable economic policy responses to them.
The policy rate is currently 5.3%. The exchange rate of the króna was fairly stable from last spring and until the winter, then strengthened again towards the end of the year and in the beginning of this year, to reach its highest point for two years. Undoubtedly the expected power-intensive industrial project in east Iceland is a contributing factor. The new monetary policy framework was introduced in a fairly tough climate of a sliding exchange rate and mounting inflation. It is fair to say that the tight monetary stance is the main reason that inflation went back down so quickly. Experience has shown that the monetary policy passed its initial test with flying colours and no one should have any doubts now about the value of monetary policy in the Icelandic economy. It works in Iceland, just as it does everywhere else. On February 10 the Central Bank published its quarterly Monetary Bulletin. As usual, this contains a new inflation forecast along with the Bank’s latest national economic forecast and a new assessment  of economic and monetary developments and prospects. The bulletin also contains an evaluation of the impact of the proposed power-intensive industry and hydropower development projects in east Iceland, which were incorporated into the inflation forecast and national economic forecast. The forecast assumes that inflation will be below the Bank’s target over the next two years. On the basis of this and the new economic forecast, the Governors announced a cut of 0.5 percentage points in the Bank’s policy rate last Monday.