These uncertainties and complexities, of course, are the reason for monetary policy committees and heavily staffed central banks. If monetary policy is complex under normal circumstances, the complexity is multiplied in a financial crisis, especially a crisis as deep as the one that Iceland has been going through. Some of the markets that are important for monetary policy transmission stopped functioning to a substantial degree. Financial institutions became impaired, and they responded differently to the Central Bank’s monetary policy instruments than they did before the crisis. The relationship with the rest of the world changed. The link between exchange rates and interest rates weakened. And expectations became seriously unstuck. Matters were further complicated because we had to change the rules of the game in response to the crisis; for example, by imposing capital controls. It is important to remember this when evaluating monetary policy in Iceland under the current circumstances. At present, the monetary policy framework is defined by the economic programme agreed between the Icelandic Government and the International Monetary Fund (IMF). The other key elements of the programme are the medium-term fiscal sustainability plan and the financial market restructuring plan. According to the programme, the most important task of monetary policy is to promote exchange rate stability. One reason for this is the currency crisis that accompanied the financial crisis, pushing the exchange rate far below levels previously thought possible, let alone desirable. This currency collapse fuelled inflation, of course, and amplified the debt crisis faced by households and businesses.

Following an exceptional increase of 6.2% last year, real GDP expanded at a more than respectable average annual rate of just over 4% during the first half of 2016. The expansion in output is being driven by domestic demand, especially by strong growth in private consumption and investment. Exports of services are also performing well, indeed significantly better than the export of goods. Growth is being driven by private market services, encompassing a mix of traditional and new sectors, including tourism and distribution, aviation and professional services. The  utilities, which were formerly loss-making, have now returned to profit, reflecting the use of cheaper energy sources and efficiency gains. Manufacturing is holding its own, with pockets of success and others that continue to face strong competitive pressures. At the same time, following vigorous growth last year, growth in value-added in construction has eased. Growth in output depends upon and feeds into a dynamic labour market. According to administrative records, which are available up to April 2016, annual employment growth consistently exceeded 4% in recent quarters. The Labour Force Survey paints a similar picture, with employment gains averaging around 3% during the first half of the year. More recently, registered unemployment has continued to fall to record low levels over the summer. Notwithstanding such a dynamic economic performance, price pressures remain contained, with inflation fluctuating in a narrow range around 1% since the beginning of the year.