Iceland’s economy is advanced, transparent and dynamic. The population is relatively young, well educated and quick to adapt to technological and scientific innovations. A strong fully funded pension system has been built up and, unlike other countries, there is no reason to fear for its sustainability. GDP per capita ranks with the highest in the world, and the economic and social infrastructure is solid. The openness of the economy results in a smaller effect from a contraction in domestic demand on employment than might be expected. The authorities shape the framework in which businesses and the financial system operate. Through its membership of the European Economic Area, Iceland enjoys similar operating conditions to those within the European Union. Nonetheless, it retains various features that influence economic advancement, such as a rather business-friendly tax environment, efficient public administration and flexible labour market. Extensive and rapid transformation of the financial sector puts supervisory agencies under pressure. The Financial Supervisory Authority (FME) has been granted an increasingly wide remit in recent years and its activities have been strengthened. One task is to monitor the banks’ transactions with main shareholders and executives. Payment and settlement systems are a key component of an efficient and sound financial system. Steps have recently been completed towards bringing their regulatory framework into line with international best practice. Although such work tends to go relatively unnoticed, it is crucial for enhancing security of settlements and reducing technical risks. The main financial sector vulnerabilities are presented in the table below.

BIS central bankers’ speeches  Together these dynamics have raised desired savings and lowered desired investment. With more savings chasing fewer investment opportunities, equilibrium safe returns have fallen sharply towards zero (Chart 8 – see also Annex). Colleagues at the Bank of England estimate that these factors can explain around 400 of the 450 basis points fall in global longterm equilibrium rates since the 1980s. 4 The persistence of many of these trends suggests that the global neutral real rate could settle around 1% over the medium to long term. Chart 8 Secular drivers pushing down on rates  Why does that matter? Central banks must set their policy rates with regard to equilibrium interest rates in order to maintain demand growth in line with supply growth and to stabilise inflation. Setting real interest rates substantially above the equilibrium rate would, in time, generate rising unemployment and falling prices. The opposite is true of setting rates substantially below the equilibrium rate. The substantial variance of the equilibrium rate over time means that a 4% policy rate would have been highly stimulative in 1980 but would be highly contractionary today. At the onset of the crisis, as households and firms sought to de-lever, the equilibrium rate fell sharply, calling for reductions of conventional policy rates to unprecedented levels. The necessary easing, however, went well beyond what central banks could deliver with short rates alone.