since 1996, the tighter monetary stance has led to a 2 - 3. 5 % appreciation of the real exchange rate. at the same, the real exchange rate appreciated by 10. 5 %. studies also indicate that this appreciation in the real exchange rate caused the current account deficit to widen by 0. 5 - 2 % of gdp, but that it will shrink again in the course of time. bearing in mind that last year's current account deficit was equivalent to 10 % of gdp, rises in interest rates have clearly not had much impact on it. a wide range of other obvious factors are at work there. suffice it to mention large - scale investment in power - intensive industries and other sectors during the first half of the period in question, a major increase in real disposable income in the past few years and credit expansion which has been funded by foreign borrowing. the central bank's monetary policy has therefore played a minor role in this development and its impact has primarily been of a short - term nature and will eventually be levelled out. of course, the central bank is also aware that open access to foreign capital softens the impact of its monetary policy. however, it should be borne in mind that access to foreign capital is not unlimited in the final analysis, and is neither risk - free nor available to all icelandic companies. household and corporate sensitivity to interest rate changes may be low at present, but in the long term the impact of higher interest rates cannot be avoided. the central bank is convinced of the impact that its interest rate instruments have, and recent discussions about high interest rates can be cited as precisely such evidence that their impact is being felt in full. furthermore, the central bank has been accused of basing its assessments of economic developments on somewhat outdated data. undoubtedly there is always scope for improvement, but the central bank does compile extensive data about financial market developments on a monthly basis, and various other data even more frequently. its data on the exchange rate of the krona, for example, cannot be more up - to - date. naturally, the bank uses data supplied by other agencies as well. it also acquires information through other channels, such as both informal and formal meetings. for this reason it is simply wrong to claim that the bank's resistance to easing its monetary stance is based on outdated information. the central bank has declared that it will maintain tight money until unequivocal signs of a cooling in the economy begin to appear. such

the twelve - month rate of lending growth was 35 %, although it has since slowed down. dmb lending increased by just over 26 % last year, somewhat more than in 1999. total lending by the credit system rose by 18. 4 %. the largest growth was in corporate lending, or 23 %, while household lending growth was slightly less at 19 %. in comparison with 1999, household lending growth increased but corporate lending growth slowed down somewhat. excluding exchange rate and price indexation adjustments, the total annualised increase in lending by dmbs during the second half of 2000 was just under 14 %, compared with 22 % during the same period in 1999. lending growth has clearly slowed down, although it is still too great to be compatible with long - term stability. heavy lending by commercial banks swells their balance sheets and weakens their equity positions by the same token. the combined equity ratio of the three commercial banks was 10. 21 % at the end of 1999, but was down to 9. 35 % at the end of 2000. the mandatory minimum equity ratio is 8 %. in part the equity position is maintained with subordinated loans, as authorised by law ; excluding these, the equity ratio was 7. 93 % at the end of 1999 and went down to 6. 28 % at the end of last year. this is a cause for concern, as the central bank has repeatedly pointed out. it leaves the commercial banks worse equipped to tackle tougher economic times than would otherwise be the case. inflation overheating of the economy generated inflationary pressures after spring 1999. inflation gradually climbed in 1999 and until spring last year, when the twelve - month rate of increase measured 6 %. it slowed down again as the year wore on and measured 3. 5 % from the beginning to the end of the year. over the twelve months until the beginning of march this year, inflation was 3. 9 %. both domestic overheating and external conditions contributed to the high inflation figure shown last year. three main factors were at work. housing prices led to a 1. 25 % increase in the consumer price index. petrol prices pushed the cpi up by just under 0. 25 %, compared with almost 1 % the previous year. finally, market services, i. e. those not provided by the public sector, began rising soon after the signing of the first wage agreements, which also involved the largest section of the labour force. the effect was a 1. 25 % rise in the cpi