Another recent factor that has served to ease inflationary pressures is that rapid growth in national expenditure  BIS Review 18/2004  5  has primarily been channelled into increased imports. It has therefore exerted less pressure on domestic factors of production than otherwise, but is reflected in a widening current account deficit, as I have discussed. In the long run, an excessive current account deficit could undermine the exchange rate and fuel inflation, although this does not appear to be much of a threat within the horizon of the latest forecast. The Bank’s macroeconomic forecast now assumes that the Norðurál aluminium smelter expansion will go ahead, which raises projected output growth to 3½% in 2004 and 4½% in 2005. The appreciation of the króna, strong increase in productivity in 2003 and large share of foreign labour employed on hydropower and aluminium projects will result in less pressure on domestic factors of production and prices than would otherwise be the case. As I mentioned earlier, it is likely that some of the appreciation of the króna in the first half of last year was connected with planned investments in aluminium and hydropower projects. Had these plans not materialised, it is almost certain that the Central Bank’s policy rate would be lower today. Due to the strengthening of the króna in 2003 and the proposed tightening of the fiscal stance implied by the budget for this year, the Central Bank’s policy interest rate has remained unchanged since February last year.

Participants are the commercial banks, savings banks and Central Bank. The Icelandic Banks’ Data Centre provides software services for both systems and the Central Bank acts as a settlement provider. These systems are described in detail in the Central Bank’s annual report. Since 2001, the Central Bank has been working in close collaboration with Fjölgreiðslumiðlun, the Icelandic Banks’ Data Centre and credit institutions on development of payment systems with the aim of bringing them into compliance with the BIS Ten Core Principles for Systemically Important Payment Systems. This work has focused on clarifying the qualifications and responsibility of management and netting system participants. Settlement processes have been reviewed with respect to finality of payments and timing of settlements. Risk management has been strengthened by defining and monitoring risks, making debt positions visible, restricting debt positions and requiring collateral for settlements. Arrangements for oversight, communication of information and contingency plans have also been reviewed. An important landmark in the development of these systems was reached last year when two sets of rules were adopted, on the Central Bank of Iceland’s real-time gross settlement system and on activities of netting systems. At the end of the year the systems were designated and notified to the EFTA Surveillance Authority. The real-time gross settlement system and netting system have thereby been recognised as legitimate payment systems in Iceland and across the European Economic Area. Also in 2003, the Central Bank and FME [Financial Supervisory Authority] signed a cooperation agreement on oversight and prudential supervision of payment and settlement systems.