capital controls, for the longer term we see it very much as a third line of defence after macroeconomic policies, and micro and more usual macropru. it is no panacea and comes with distortions. all of this remains a work in progress, and history will tell whether it will be sufficient to preserve monetary and financial stability in the rougher seas of freer capital movements that we intend to embark upon. 2 / 2 bis central bankers'speeches

earlier situation, so the bank must reiterate its words of warning. at the same time as the central bank announced its interest rate decision yesterday, it published monetary bulletin. this outlines the main assumptions behind the bank ’ s decision along with indications about its policy in the near future and the viewpoints it considers important to bear in mind for economic policy. in the current edition, major changes were made to the assumptions behind the baseline forecast, which enhance both the credibility of the forecast and monetary policy transparency. by doing so, the central bank of iceland joined the vanguard of the inflation - targeting central banks. monetary bulletin reveals that inflation developments have turned rather more favourable than the bank ’ s previous forecast had indicated, and although underlying inflation was somewhat higher in february and march than was hoped, the bank expects both headline and underlying inflation to decrease rapidly in the next months. by both measures, inflation will be close to target from the middle of 2008. there is no doubt that this outcome is largely thanks to the tight monetary stance, which included raising the policy rate by 3. 75 percentage points last year. as usual it should be pointed out – and especially in the current climate – that exchange rate uncertainties can complicate this picture. the exchange rate has been relatively stable after the adjustment that took place in the first half of last year, and the krona is currently somewhat stronger than historical measures would warrant, although it should be admitted that determinism is probably not the most suitable approach for assessing currency developments. one reason for uncertainty about the exchange rate is the large current account deficit, as well as the fact that it can easily be driven by factors over which we have no control, given how closely iceland ’ s financial sector is now integrated with global financial markets. a central bank with a legislative and regulatory remit to target inflation is of course pleased with such inflation developments, but would prefer them to be built on a more solid foundation. domestic demand growth has declined, but rather more slowly than the bank had hoped. the current account deficit is large and will also contract more slowly than the bank would have desired. demand remains buoyant in the housing market and there are indications that the rate of credit growth may be on the increase again. for these and other reasons, the bank will remain on the alert and not ease its monetary stance until even clearer signs emerge that a lasting change has been established. equity prices have soared in iceland in recent years. one explanation for the increase may be that