in the world. however, occasional tasks can differ and call for specific measures. this is what we see from the central bank of iceland ’ s policy rate at the moment. it is not reflected anywhere else. the explanation is that the picture in iceland is unique, and maintaining a low and stable inflation rate in the current climate would widely be thought an ambitious aim. first, the largest single investment programme in iceland ’ s history is now under way, and landsvirkjun and its foreign business partners are by no means the only investors planning major projects. second, we are simultaneously experiencing the largest - ever overseas expansion of the icelandic banking system, which has accumulated foreign debt on an unprecedented scale with accompanying capital inflows. third, the icelandic credit market has been sharply transformed, with an open invitation for everyone to join in. fourth, tax cuts have been implemented or announced for the coming months. and to add the icing to the cake, wage earners are compensated for the inflation caused by the broad rise in their house prices which has taken place at no cost to them. this is the climate in which we aim to ensure that medium - term inflation will obey the principles set for it in the central bank act and the joint declaration by the central bank and government of iceland. this must surely be considered an ambitious goal. sizeable imbalances can be seen in the global economy. the massive us current account deficit is eating up a large share of total global saving at present. managed exchange rates elsewhere, for example in china, delay markets in responding to this problem. economists claim that a change is inevitable, and the later that it comes, the more upheaval it will cause when it eventually does. as far as iceland is concerned, however, external conditions have been favourable so far. it enjoys high creditworthiness and wide open access to markets. interest rates have been low and product prices high, making the strong position of the krona – which will not last forever – much easier than otherwise for many to weather. but we need to make sure that favourable external conditions in most areas do not become a fundamental precondition for our own success. in my opinion – after only a few weeks at the central bank of iceland – one of the main reasons that its management is employed there is to pay particular attention to risks in the economy. i shall mention the following illustration. of course it is perfectly normal for progressive and rapidly growing banks, which feel constrained by the small size of

. while recent information on the short - term outlook should obviously be observed, it is even more vital to look at indicators for longer - term developments. in effect the central bank has no other option – like god ’ s mills, the bank ’ s instruments grind slowly, but grind exceedingly well, if patience and foresightedness guide the way. the central bank has made no secret that the current strength of the krona is not sustainable in the long run. an important change this autumn and so far this winter has been large - scale issues of krona - denominated bonds in international markets. in particular, these issues are driven by the wide interest - rate differential between iceland and other developed countries. the current monetary bulletin attempts to analyse the impact of these issues, including a separate article dedicated to this topic. their impact can be positive. for example, it can lead to more efficient foreign exchange and securities markets in iceland, thereby benefiting domestic economic developments. however, the issues can also – at least temporarily – create uncertainty about the transmission of monetary policy and even intensify its impact effect through the exchange rate channel. such a pass - through hits export sectors hard, while doing little to subdue private consumption growth. one standard assumption underlying the inflation forecast published in the current monetary bulletin is that the policy rate will remain unchanged from the day of forecast. on the basis of this scenario, the board of governors decided to raise the policy rate by 0. 25 percentage points. the central bank ’ s monetary policy over the medium term will need to ensure that the exchange rate adjustment which appears inevitable in the long run does not result in a higher rate of inflation than is compatible with the target. a tight monetary stance will be required to do so, for as long as capacity and labour market pressures pose inflationary threats. furthermore, a sufficiently wide interest - rate differential with abroad must be maintained to contribute to a smooth exchange rate adjustment. the surge in house price inflation has reached a peak. if the krona remains relatively strong and stable, goods prices are also quite likely to fall. thus the outlook is for a slowdown in the inflation rate in the coming months, not least because the depreciation of the krona this year has only been passed on to the domestic price level to a limited extent. if the housing market cools more quickly than the central bank forecasts, house price inflation is likely to slow down even more sharply than is currently expected. foreseeable