ongoing investments in the aluminium and power sectors. much has changed since the meeting a year ago, some things for the better, and others not. the current account deficit run up last year will not be forgotten for a long time – it even managed to trump the most pessimistic forecasts. fortunately, clear signs of a gradual contraction are now visible, but this improvement is likely to be slower than we had previously expected, especially on account of foreign debt service. the board of governors of the central bank decided yesterday to leave the bank ’ s policy rate unchanged at 14. 25 %, at the level where it has been since december. by contrast, the day before last year ’ s annual meeting, the board of governors raised the policy rate by 0. 75 percentage points. these two decisions hopefully give some indication of where the central bank considers that it currently stands in the battle against inflation. this battle is a priority and there is no doubt that a successful outcome is very much in the national interest, not least for young people who have taken on heavy liabilities to secure themselves short - term or long - term housing. household debt with the deposit money banks has surged in iceland in recent years. however, debt service as a proportion of income has not grown, due to the more favourable credit terms now available, as well as rising incomes. loan delinquency is still minimal. both these indicators are very positive. however, this does not alter the central bank ’ s concerns about excessive borrowing, or at least very precarious borrowing, which could make the foreseeable economic contraction very tough for indebted households, and in some cases insurmountable. in such conditions, rising inflation could deal many households a heavy blow. some people have responded to iceland ’ s relatively high interest rates and price indexation by switching their debts to foreign currencies, but the benefits could prove short - lived if the krona depreciates. a depreciation would be instantly reflected in repayments on these foreign loans. its impact on domestic indexed borrowing would be less and come later. at the last annual meeting, it was pointed out that the central bank had strongly encouraged financial institutions to curtail their credit growth at that time which, in the bank ’ s view, had gone beyond all reasonable bounds. they responded positively to the bank ’ s recommendations, and there was no question that credit growth slowed substantially. however, there are now many indications of a return to the

from macroprudential policies bear watching. if regulators take a discretionary path, the policies may increase market and investor uncertainty on policy kupiec, p. h. et al. ( 2013 ), “ macroprudential policies and the growth of bank credit, ” aei economic policy working paper 2013 – 08, december ; and aiyar, s., et al. ( 2014 ), “ does macro - prudential regulation leak? evidence from a uk policy experiment, ” journal of money, credit and banking, 46 ( 1 ), supplement. see borio, ( 2014 ), idem. see taylor, j. b. ( 2014 ), “ re - normalize, don ’ t new - normalize monetary policy, ” the hoover institution economics working paper series, no. 14109 ; borio, c. ( 2011 ), “ implementing a macroprudential framework : blending boldness and realism, ” capitalism and society, 6 ( 1 ) ; and cochrane, j. h. ( 2014 ), “ toward a runfree financial system, ” april, available at ssrn. see, for example, taylor, j. b. ( 2009 ), getting off track : how government actions and interventions caused, prolonged, and worsened the financial crisis, hoover institution press publication no. 570 ; and adrian, t. and n. liang ( 2014 ), “ monetary policy, financial conditions, and financial stability, ” federal reserve bank of new york staff reports, no. 690, september. bis central bankers ’ speeches duration and future changes, producing errors and inhibiting financial activity. the unknown market response to transitory measures complicates the operation of monetary and other policies. incentives for the diversion of investor time and resources to lobbying efforts could ensue, making implementation difficult and potentially leading to their deferral. additionally, discretion may result in an ample range of distortions and system inefficiency. while preferable, a rules - based approach, if too severe, potentially limits the number of trades and transactions, curtailing total financial activity and making it too standardized. another danger is that if rules are countercyclical, in downturns, they may potentially lead to irresponsible behavior, and possibly, to instability. 11 these measures could also carry long - term risks to the system. for example, they can give rise to the interpretation that regulators will assume a large fraction of system risk,