probably decline in the near future, both due to debt restructuring and because the vast majority of new bank loans are in domestic currency. the banks have limited capacity to lend in foreign currency, both because of a shortage of foreign exchange and because they are operating under temporary exemptions from central bank rules on maximum foreign exchange imbalances. of course, this is good news, in a sense, because the sooner the weight of foreign debt diminishes, the sooner monetary policy will be released from the straitjacket of restraint far greater than is desirable in light of current domestic economic conditions. other factors that could help in this context are new foreign exchange inflows and lower risk premia on domestic krona - denominated assets, which would obviate the need to maintain exorbitant interest rates in order to keep isk assets in the country or attract new capital. i have expanded at some length on current monetary policy objectives because i consider it important that these objectives be understood. but what are the instruments of monetary policy? it can be said that, apart from reserve requirements and other similar tools, which are seldom changed, the bank ’ s interest rate decisions, foreign exchange market intervention, and capital controls are its chief monetary policy instruments. these instruments must be properly aligned, and consequently, interest rate decisions take account of capital controls. the controls provided some shelter for interest rate decisions for a while ; however, as soon as they are relaxed, interest rates must be high enough to give investors an incentive to hold isk assets. just how high they must be is determined in part by the risk premium on the republic of iceland, which fortunately has declined significantly in the recent term. for example, the republic ’ s cds spread has fallen from around 1000 basis points at the beginning of the year to about 350 points. but what about foreign exchange market intervention? it is a tricky instrument and, if misapplied, yields nothing at best and generates enormous losses at worst. refusing to use it at all, however, would be unnecessarily extreme. one of the lessons of the financial crisis is that the proper deployment of foreign exchange reserves can be of key importance in preserving monetary and financial stability under difficult circumstances. this is supported by innumerable examples from countries from brazil to korea. there is no benefit in amassing foreign exchange reserves during an economic upswing if one is chary of using them in times of need. the public sector can take a broader view

. certainly, my own judgment is that, if anything, inflation may prove a little more persistent next year than presently embodied in our projections. this is sometimes referred to as the “ battle of the mark - ups ” in the unemployment literature ; see e. g. p. r. g. layard, s. j. nickell and r. jackman ( 1991 ), unemployment : macroeconomic performance and the labour market. bis central bankers ’ speeches on its own, that might appear to imply that bank rate needs to rise faster than implied by the market yield curve that underpins our projections. but the risk of inflation staying above the target into the medium term needs to be weighed against the downside risk to growth and the prospect of a persistent margin of unused resources in the economy. allowing inflation to come back gradually towards the target would allow the margin of spare capacity to close more rapidly, and would be in line with our remit that tells us that temporary deviations of inflation from the target are permissible if they help to avoid excessive volatility in output. i hope my remarks today have given you some insight into the issues that the mpc is presently grappling with. you will be aware that the spread of opinion on the committee is unusually wide right now. that is in large measure a reflection of the substantial challenges and uncertainties facing the uk economy at the current juncture. indeed, given the extreme nature of recent events, it would be surprising if the committee were entirely at one in its assessment of the outlook and its judgement of the appropriate policy response. but the committee is united in its objective of meeting its inflation mandate in the medium term and playing its part in restoring the economy to a high and stable level of activity. thank you! bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches