sigurðsson was appointed governor from october 1, 2003. he therefore served on the board of governors for almost three years. before that he was a member of the supervisory board for just over two years. on behalf of the supervisory board i would like to thank jon sigurðsson for our pleasant work together during his terms as both a member of the board of governors and a member of the supervisory board. ingimundur friðriksson was temporarily appointed governor from june 15 to august 31, 2006, then appointed governor for a seven - year term from september 1, 2006. ingimundur friðriksson had been assistant governor since 1994 and held a temporary appointment as governor for one year from 2002 to 2003. a number of changes took place in central bank staffing during 2006. fifteen employees left or retired from the bank and ten were hired, so their number decreased by five during the year. at the end of 2006 there were 111 employees at the central bank of iceland, while the number of full - time equivalent positions was just over 102. among the retirees was sveinn erling sigurðsson, director of the statistics department. lilja steinþorsdottir left the post of chief auditor during the year. the chief auditor is directly accountable to and appointed by the supervisory board. on behalf of the supervisory board i would like to thank lilja steinþorsdottir for our pleasant work together. in her place, the supervisory board appointed stefan svavarsson chief auditor. financial institutions compete fiercely for talented employees, which is not surprising given the pace at which the icelandic banks ’ activities have expanded. it is vital for the central bank to have as capable employees as possible in its service. it must take prevailing conditions into account to ensure that this is the case. on the supervisory board in 2006, olafur g. einarsson resigned from the post of chairman which he held since 1998. helgi s. guðmundsson was elected chairman in his place. on behalf of the supervisory board i would like to thank olafur g. einarsson for his particularly successful leadership during his years as chairman. the supervisory board held 22 meetings during the year. i would like to thank the members of the supervisory board for their pleasant cooperation and fine work. i also thank the board of governors and employees of the bank for their very good work during the year and fruitful collaboration with the supervisory board.

s evaluation of the situation and prospects, the premises behind the inflation forecast and the inflation forecast itself. in accordance with the provisions of the act which entered into force in the spring of 2001, the board adopted internal rules on the preparation of, arguments for and presentation of its monetary policy decisions. the rules were formally approved at the beginning of 2002 and published in the quarterly monetary bulletin. the inflation target adopted in march 2001 removed the earlier fluctuation bands set for the isk exchange rate and the exchange rate was floated. the new monetary policy framework was introduced under rather difficult conditions, with a sliding exchange rate and mounting inflation. it is fair to say that the tight monetary stance is the main reason that inflation receded as sharply as it did in 2002. experience has shown that the monetary policy passed this demanding trial with flying colours and no one should any longer doubt its value for the icelandic economy. it works in iceland just as it does everywhere else. the central bank responded to imminent inflationary pressure by raising its interest rates in 1998 and still further in 1999 and 2000. the interest rate increase served to reduce excess demand in the economy and the isk exchange rate rose, thus slowing increases to the consumer price index ( cpi ) in an overheated economy. early in 2000 the fluctuation bands for the krona were widened, in part because the previous limits were then felt to be restraining the rising exchange rate, which was regarded as necessary to counter inflationary pressure. the exchange rate peaked in the spring of 2000, when it was just over 12 % higher than at present. market expectations changed in the spring of 2000, and the exchange rate began a downward trend. there are no doubt various explanations as to why this occurred but probably the major factors were concern at a sizeable current account deficit and the resulting enormous need for foreign financing, together with icelandic investments in foreign securities during that same year, not least by pension funds. the downward exchange rate slide lasted until late november 2001. several times during the period from mid - 2000 until well into 2001, the central bank intervened in the currency market in an attempt to prevent a further decrease in the exchange rate. the bank intervened in particular when a downward spiral seemed to be forming, or when the bank felt that its intervention could have a positive effect in changing market expectations. this was based in part on the bank ’ s conclusion that the exchange rate had already dropped more than was reconcilable with long - term equilibrium in the economy.