In light of this forecast, at the same time as Monetary Bulletin was published the Central Bank decided to raise its policy interest rate by 0.25 percentage points, which is a somewhat lower hike than market agents had predicted and also less than the Bank’s other recent policy rate rises. The policy rate is therefore currently 9%. Among other things, the decision to take a relatively modest step now is based on the fact that the tightening implied by the recent policy rate hikes and the significant appreciation of the króna have yet to be transmitted in full. Nonetheless, further tightening may be necessary over the next few months. Comparisons with previous forecasts and various indicators suggest that since December the Central Bank’s policy rate hikes have by and large delivered a tighter stance. The Central Bank’s monetary policy is very much debated in society at large at the moment, which is natural given the great interests at stake. Obviously I have closely followed discussions of monetary policy for a fairly long time and must admit that the debate in recent times has been more mature and bears witness to a deeper understanding of economic principles than before. It is normal for opinions to be divided over the Central Bank’s measures during tight stances such as the present. The Central Bank welcomes public debate and is ready to take part in it. I would like to use this opportunity to address a few points that have been raised in this debate recently.
The current account of Ireland has moved from a deficit of 6.6% of GDP to a surplus of almost 6% today. 19  In this regard it is impressive that some suggest centralised oversight and influence over such decisions. See Draghi (op. cit.) and Trichet, J C (2011), “Building Europe, building institutions”, on receiving the Karlspreis 2011 in Aachen, 2 June 2011. 20  Real incomes should eventually rise if structural reforms generate a productivity dividend. 6  BIS central bankers’ speeches  weakness of nominal income growth that is so harmful in dealing with a debt overhang and creates the tail risk of stagnation. So if increased flexibility is not sufficient, what else is required? The answer is to build the risk sharing institutions that are present in any successful currency union. This means financial integration and common fiscal arrangements. In other words, both private and public risk sharing. It is not realistic to expect the private sector to do everything the public sector will not. Before the crisis, the European financial system appeared in many respects to be highly integrated with cross-border bank loans amounting to more than a third of total bank lending. However, most of this was interbank loans, implicitly backed by the state. With many of the recipients being judged too big to fail during the crisis, creditors weren’t exposed to loss for fear of systemic damage.