over 12 % in trade - weighted terms, and nearly 17 % against the euro, without any intervention by the central bank. external imbalances have disappeared, and the underlying current account balance is now in surplus. inflation has fallen from about 18 % at the beginning of 2009 to the present 4½ %. it is moving rapidly down to the central bank inflation target of 2½ % and, excluding the effects of tax increases on price levels, will be at target early next year. concerns that the icelandic government will fail to pay instalments on foreign loans in 2011 and 2012 have vanished as the foreign exchange reserves have grown, as i will expand on in a moment. in spite of the market ’ s grave concerns about the debt situation in many smaller european countries, and in spite of rising cds spreads on those same countries and the tendency towards contagion and a herd mentality in the market, iceland ’ s cds spread has declined and is now considerably below those in the european countries whose debt problems have received the most press coverage. but output growth is slow in coming, and in that regard, iceland is far behind most other countries whose gdp began to grow late last year. at the moment it is quite difficult to interpret the signs, which are quite changeable in the current post - crisis turbulence. for example, quarterly gdp figures and various other statistics are quite volatile, changing from one revision to the next – a problem that is global in scope at present. as a result, the central bank was sceptical when figures from statistics iceland indicated that gdp had begun to grow in the fourth quarter of 2009. the most recent numbers, which indicate a contraction, are more accurate, although i would not be surprised if the contraction proved somewhat smaller in the final figures. most indicators suggest that we have hit bottom and that gdp will begin to grow in the latter half of this year, but i do not expect that growth to be strong. in order for gdp growth to gain any real momentum, investment must rise from its current historical low. gross capital formation will be just over 14 % of gdp this year, the lowest investment ratio since world war ii. in my opinion, although lower real interest rates will stimulate investment ( other things being equal ), other factors are more important, such as post - crisis risk aversion, bruised corporate balance sheets, uncertainty about demand and operating environments in the future, and drastically reduced access to foreign credit. i think this chart, which shows the limited connection

between real policy rates and investment ratios in oecd countries last year, supports this view. there is no significant relationship between the two, and if we exclude three outliers ( israel, hungary, and ireland ), the inverse emerges. the uk and iceland had similar investment ratios, even though the real policy rate was negative there and positive here. of course, any simple cross - sectional correlation of this type should be interpreted with extreme caution, as the economic structure of countries varies and other important influencing factors are not taken into account. furthermore, correlation is not the same as causation. thus, in many countries, real policy rates are historically low because investment is weak. on the other hand, the relationship should be stronger than is shown here if real interest rates currently exert the strongest influence on investment ratios. it is important for future output growth that iceland re - establish a normal business relationship with the rest of the world, including lifting the capital controls and gaining access to foreign credit markets on acceptable terms. we have said that the prerequisites for capital account liberalisation are macroeconomic stability, sufficient foreign exchange reserves, and a financial system that can stand on its feet without capital controls. the first of these conditions has been met, and the next will be met upon successful conclusion of the third imf review. the prospect of meeting the third condition in the next few months has improved in view of strong interim earnings reports from two of iceland ’ s large commercial banks and the recent supreme court judgment concerning the interest rate to be used for loans with nonbinding ( illegal ) exchange rate linkage clauses. but it would be a misunderstanding to assume that the timeframe can be measured in terms of weeks rather than months. we must receive the next tranche of the imf loan after the third review, and we probably cannot pronounce the banks sound with respect to capital account liberalisation until late november. furthermore, it is appropriate to bear in mind, as the recent unrest in the bond market shows, that there are short - term risks related to the removal of the controls ; thus it is important that each step be well prepared. but if nothing unexpected arises, the time is coming closer, and preparation is underway within the central bank. of course, we won ’ t make much progress in lifting the controls or gaining access to foreign credit markets if the icelandic government is considered unlikely to be able to fulfil its foreign loan obligations. fortunately, though, once the next