In addition, there was a slow down in the growth of Government, private and non-bank financial institutions sectors borrowings to 2.3%, 3.1% and 10.3% in January 2004 from 3.1%, 3.4% and 14.5%, respectively. On a year-on-year basis, domestic credit slowed down by 7.5 percentage points to 40.0%. •  Following the reduction in the statutory reserve ratios on commercial banks’ Kwacha and foreign currency deposits to 14.0% from 17.5% on 31st October 2003, commercial banks’ total loans and advances increased by 6.6% between October 2003 and January 2004 in nominal terms. Sectors to which most of this lending went with respective percentage increases were: agriculture (12.2%), mining (36.3%) and electricity, gas, water and energy (316.9%). However, credit to the manufacturing sector fell by 18.8% while lending to the transport, storage and communications sector declined by 9.6%. Interest rates Yield rates on Treasury bills and Government bonds •  High liquidity levels, coupled with Government’s restraint on further borrowings from the market, continued to exert downward pressure on yield rates. The weighted average yield rate for all Treasury bills fell by 3.7 percentage points to 15.5 percent in February. This was driven by declines in the individual yield rates of all Treasury bills. •  Similarly, yield rates on Government bonds further declined, supported by reduced Government borrowing and abundance of liquidity in the market. Thus, the weighted average yield rate for all Government bonds fell to 17.5 percent in February from 22.7 percent in January.

The presence of the Housing Finance Fund in the mortgage market and its state guarantee distorted the market and hindered policy rate increases from being reflected in mortgage rates. Moreover, the Central Bank was not able to sufficiently affect expectations in the market with its decisions and pronouncements. This significantly changed in early 2007 when the Bank began, like the Central Banks of Norway and Sweden for example, to publish a future policy rate path. That change greatly improved the communication and transparency of monetary policy and significantly strengthened the transmission mechanism as policy rate decisions were much more effectively reflected through the maturity spectrum. The Treasury has delivered surpluses over a number of years. They and the privatization proceeds from earlier years were used to retire debt, leaving the Treasury currently without debt in net terms. In fact, the Treasury earned net interest income in 2007. Its deposits in the Central Bank are currently equivalent to roughly 12% of GDP. Nevertheless, it is evident from developments over the last few years that fiscal policy was not sufficiently tight to aid monetary policy in containing inflation. Domestic demand has been slow in responding to tightened monetary policy. The higher policy rate meant that the Icelandic króna became an attractive investment vehicle for foreign investors. International issuance of Icelandic krónur bonds commenced in 2005 with relatively lively issue activity – albeit fluctuating – into the early part of this year. It followed a pattern very similar to that experienced by New Zealand.