Such risks, and the fact that they were not addressed, played a major role in the run-up to Iceland’s financial crisis. We have tried to learn from this. In addition, it is clear that small open economies that are financially integrated with the rest of the world face increasing difficulties in pursuing independent monetary policy without jeopardising financial stability if they adhere to conventional economic and prudential policies. To solve this problem, it is not sufficient to have a floating exchange rate. Additional tools and measures must be applied. Among them are foreign exchange market intervention, conventional macroprudential tools, and rules that limit foreign exchange mismatches in domestic balance sheets. Conditions could arise, however, where this would not suffice, and then it could prove necessary to activate capital flow management measures like the special reserve requirement that we have used in the recent past. This mainly occurs when the exchange rate is higher than is warranted by economic conditions, international reserves are ample, and the economy is on the verge of overheating. Under such conditions, it is difficult to use exchange rate flexibility, foreign exchange market intervention, or interest rates to counteract capital inflows. The next challenge is to ensure secure, efficient, and economical payment intermediation. Last year the Central Bank issued a report on retail payment intermediation from the standpoint of contingency and financial stability. It discusses important public interests.
28 March 2019  Speech Már Guðmundsson, Governor of the Central Bank delivered at the 58th Annual Meeting of the Central Bank of Iceland, 28 March 2019  Prime Minister, other ministers, Chairman of the Economic Affairs and Trade Committee and other members of Parliament, bank directors, foreign ambassadors, other honoured guests! This is the last speech I will give at the Annual Meeting of the Central Bank of Iceland, as I will step down as Governor this August, as is provided for by law, after ten years in the position. I would therefore like to focus on matters other than current tasks relating to monetary policy, financial stability, and other Central Bank functions, but it is unavoidable to make an assessment of the most recent events. I will focus on two main areas. First of all, I would like to take a backward glance at developments in the Icelandic economy and financial system over the past ten years. In this context, I will give my assessment of how successfully the Central Bank has achieved its objectives. The published and printed versions of this speech will include selected charts that illustrate economic developments over the period. Second, I will take a look at the future and discuss several challenges in connection with the Central Bank’s tasks and objectives. Let us now cast our minds back to mid-2009. At that time, Iceland was in the midst of its severest economic contraction since World War I, a century ago.