Apart from a short period early in this decade, when Iceland was at an entirely different point in the business cycle than it is now, the Central Bank’s interest rates are at their lowest since the early 1990s, when they became an important monetary policy instrument. We must therefore consider realistically whether we can expect further reduction of interest rates without an outright slack in the economy. Developments in Central Bank rates over the coming term will be determined by economic developments, which could be in either direction. When we met a year ago for the Bank’s Annual Meeting, the vast majority of the capital controls had just been lifted. As expected, exchange rate volatility increased afterwards. But that volatility proved temporary, and short-term fluctuations in the exchange rate subsided markedly in the latter half of the year. In recent months, short-term volatility has actually been limited in historical and international context. The Central Bank has not intervened in the foreign exchange market in recent months, supporting the conclusion that this reduced volatility is due to improved balance in capital flows. According to currently available forecasts, GDP growth is set to remain robust and the domestic economy will experience a “soft” landing. The outlook is uncertain, however, and various risks could materialise, not only in Iceland but also abroad, where uncertainty is considerable at present. In addition, it is important that there is considerable scope for interest rates and large foreign exchange reserves to respond to adverse developments.

I would argue that far from being in conflict, competitiveness and high prudential standards complement each other – you cannot have one without the other. The UK’s status as a pre-eminent, global insurance market depends heavily on the robustness of the infrastructure within which it operates: a reliable legal system, for example, and a robust regulatory regime that allows policyholders, reinsurance cedants, and other counterparties to transact with confidence. I know that different parts of the market have different priorities. For some parts of the UK insurance sector – particularly life insurance – the priority is to address areas of Solvency II that you feel do not work as well as they could, whilst for others of you the primary focus is on maximising international market access. Some of the changes to the prudential regime that we are considering within the review of Solvency II should result in changes across the sector: such as the reform of reporting requirements, and streamlining our approach to approval of internal models, all which should affect a wide range of firms; others, such as reviewing the design of the risk margin and the matching adjustment, will focus more on the life insurance sector. At the same time we remain open to international participation in the UK insurance market, engaged more than ever in international policy making and active supervisory co-operation and fully supportive of the international activity of insurers based here. We are maintaining strong, cooperative working relationships with regulators in other jurisdictions, bilaterally and through colleges.