Monetary policy was successful in bringing inflation — and thereafter, inflation expectations — back to the target after 2012, without sacrifice costs in terms of employment Furthermore, the use of new policy instruments helped ensure that the exchange rate of the króna was countercyclical rather than procyclical, as it had been to some degree before the crisis. Inflation remained close to the target for about five years. When the banks failed in autumn 2008, new banks were established virtually overnight. These banks received deposits in Iceland and matching assets, and became a new channel for domestic payment intermediation. There was hardly a hiccup in domestic payment intermediation, which has to be considered quite a feat. As I mentioned earlier, the task of recapitalising the banks and finalising the new-bank-old-bank split remained. It was decided that the old banks should take an equity stake in two of the new ones. To begin with, there were sizeable imbalances in the banks’ balance sheets, including foreign exchange imbalances, and non-performing loan ratios were very high. As a result of various measures and the economic recovery, the imbalances subsided and non-performing loan ratios fell rapidly from 2011 onwards. Since 2015, they have been relatively low in historical context. The banks’ capital adequacy ratios increased, both for these same reasons and because the Financial Supervisory Authority prohibited dividend payments without explicit approval during the banks’ first years of 4  operation and the capital controls made dividend payments to foreign creditors less feasible.

We must not forget, either, that financial crises of the magnitude of the one in Iceland cast long shadows, and many have faced hardship for a long time afterwards. This underscores the necessity of safeguarding financial stability. The Central Bank’s contribution to this successful outcome is threefold: formulation and implementation of monetary policy; participation in the resurrection of the financial system and the formulation and implementation of financial stability policy; and participation in the development of the capital account liberalisation strategy and the execution of the strategy. I will now turn to these three factors and, as I do so, move to the present day. Inflation subsided in 2009 and 2010 as the inflationary impact of the steep drop in the exchange rate in 2008 tapered off and the exchange rate stabilised in H2/2009 and then began to rise in 2010. Inflation declined steadily until it fell to target in late 2010. As inflation eased, Central Bank interest rates were cut, reaching a low of 3½% early in 2011. Inflation expectations remained above the target, however. In H2/2011 and 2012, inflation rose again following the depreciation of the króna and large contractual wage increases. We know now that monetary policy achieved good results in its response to this situation. The response consisted of interest rate hikes and signalling of further ones to come, but also of more active use of other policy instruments such as foreign exchange market intervention and, later, the special reserve requirement on capital inflows into the bond market and high-yielding deposits.