measured inflation was below it. but fortunately, inflation expectations have subsided towards the target in the recent term and, by some measures, are close to it, particularly short - term expectations. this is important for monetary policy, as i will explain shortly. i have briefly discussed the current situation and the economic outlook. but what about uncertainties and known risks? there are risks attached to the global economy, which seems to be on the downside, at least in the near term, as regards both output growth and inflation. and there is the risk that our economic policy and contractual wage negotiations will not be successful, as has so often been the case during upswings. gdp growth will then be somewhat stronger in the short run, but the current account balance will deteriorate and inflation will rise, and ultimately gdp growth will fall below what it would have been otherwise. there is uncertainty about the exchange rate, in connection with the settlement of the failed banks ’ estates and the liberalisation of the capital controls. there is little i can say about that at this point, but the aim of the work the authorities are doing at present is to minimise that risk. it can be done, but it is a risky process, and one that could be derailed at many points along the way if great care is not taken – and perhaps even if great care is taken. and now i will turn to monetary policy. yesterday the monetary policy committee decided to lower central bank interest rates by 0. 25 percentage points, in view of recent developments and the near - term outlook for inflation and the decline in inflation expectations, which i mentioned a moment ago. if the bank ’ s interest rates had remained unchanged, its real rate would have been higher than is warranted by where we are in the economic cycle and by the near - term outlook, particularly in view of the fact that it could rise still further in coming months. estimating the central bank ’ s real rate is not always a simple matter, as different measures of inflation and inflation expectations give differing results. according to an estimate based on the average of various measures of inflation and inflation expectations, the bank ’ s real rate was about 2½ % before the recent reduction, and it had risen by approximately a percentage point in the previous year, which is a large change in terms of real rates. it could be argued, too, that this is more likely an underestimation than an overestimation, as there is systemic positive bias in

mar guðmundsson : economic outlook, monetary policy, and credit ratings speech by mr mar guðmundsson, governor of the central bank of iceland, at the chamber of commerce monetary policy meeting, reykjavik, 6 november 2014. * * * madame chairman, honoured guests, the iceland chamber of commerce has a long - standing tradition of holding a meeting like this one on economic developments and prospects and monetary policy. the meeting is held following the publication of the central bank ’ s autumn forecast and, in latter years, the monetary policy committee ’ s interest rate decision. it often has an additional specific topic, and on this occasion, our hosts have expressed an interest in the outlook for credit ratings. i will touch on that towards the end of my talk today, but as i usually do, i will focus mainly on monetary policy and the current and future economic situation. the big picture regarding the economy is this : the recovery that began in q2 / 2010 is now well enough advanced that the slack in the economy is almost fully absorbed. the domestic economy has seldom been as well balanced as it is now. there is internal equilibrium, in that inflation has been at or below target for nine months and output is close to capacity. and there is external equilibrium, in that we have had a sizeable current account surplus that covers net capital outflows with room to spare, as the central bank has bought foreign currency for a total of 95 b. kr., or 5 % of gdp, so far this year. according to the bank ’ s forecast, the near - term outlook is positive. gdp growth is projected to measure just under 3 % this year and then rise to about 3½ % in 2015 before tapering off again to 3 % in 2016. this level of growth is expected to exceed that of potential output with the effect that a positive output gap might emerge, particularly in 2015. other things being equal, this will contribute to higher inflation. gdp growth in 2014 – 2016 will be driven by domestic demand, both private consumption and investment, and the contribution from net trade will be negative for the entire period. as a consequence, the sizeable current account surplus we have seen in the recent term will shrink rapidly next year and give way to a small deficit in 2016. this is cause for concern in and of itself, and we hope that the forecast will not materialise, as iceland needs to maintain a current account surplus in the next several years as it focuses on putting its external