Már Guðmundsson: Overview of economic developments and prospects and monetary policy conduct in Iceland

Speech by Mr Már Guðmundsson, Governor of the Central Bank of Iceland, at the 57th Annual Meeting of the Central Bank of Iceland, Reykjavík, 5 April 2018.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Mr. President; Prime Minister, other Ministers, Speaker of Parliament, Directors and Ambassadors; Ladies and Gentlemen!

The Icelandic economy has been in fine fettle recently, with full employment, to say the least, as we have had to import a large number of workers to support economic activity. The risk of overheating has receded somewhat in the past year, however; the positive output gap has narrowed, and the residential housing market is less stretched than it was a year ago.

Until last month, inflation had been close to target but below it for four years running. Inflation expectations have been at target by most measures in the recent past. It is this that has enabled the Bank to lower its policy interest rate by 0.75 percentage points since our last Annual General Meeting. Inflation expectations have fallen to the target and have become more firmly anchored there, reflecting the success of monetary policy in the recent term. The Bank's Chief Economist recently published a Working Paper explaining this success, noting as well that the decline in inflation to the target between 2012 and early 2014 was virtually costless, partly because of increased credibility of monetary policy. If changes are made to the monetary policy framework in the coming term, it is important to preserve this success.