short - term effect at best. regular foreign exchange purchases were stepped up in january and again in february. now, the bank purchases 1½ million us dollars daily and has purchased the equivalent of 11 b. kr. since the autumn. in the central bank ’ s view, various factors may have caused the krona to strengthen in recent weeks, not least expectations about the east iceland construction projects, a possible underestimation of the degree of slack in the economy at the moment, and increased fishing quotas. in assessing the exchange rate it is important to point out that in real terms the exchange rate is not much higher at present than its average over the past ten years. thus there is no possible way to claim that the current exchange rate is blatantly out of step with what is appropriate for the economy or is far from the real equilibrium exchange rate. it has also been claimed that there is a significant risk of deflation in iceland. the central bank considers the likelihood of this to be negligible. in fact, the talk of deflation can largely be expected to reflect international discussion of the same issue, with claims from various quarters that there is a risk of deflation in germany and the usa in the same way that has happened in japan. nothing suggests that deflation is looming in iceland – wage costs have risen, growth in money supply is robust, inflation expectations in the market are around 2 % or above, and one of the largest construction programmes in icelandic history is on the horizon. it may be added that, up until now, iceland has never had any problems in kindling inflation. in light of all the above, the central bank does not believe that there are grounds for a large cut in interest rates in order to bring down the exchange rate of the krona or dispel the risk of deflation, which is virtually nil anyway. such action would probably pave the way for subsequent overheating of the economy and inflation. the central bank will continue to base its interest rate decisions on its mandatory role of contributing towards price stability and on the joint declaration of the government and the bank from march 2001 which specifies the inflation target. through steadfast monetary policy which ensures price stability, monetary measures will contribute towards promoting a stable economic environment which is the foundation for the economy ’ s growth capacity in the long run. on the basis of the new inflation forecast and national economic forecast, the central bank announced a cut of 0. 5 percentage points in the

it makes sense for macroeconomic surveillance to have a clear focus on the euro area countries with large current account deficits, significant losses of competitiveness and high levels of public and private debt. as regards fiscal surveillance, ambitious benchmarks are needed when establishing an excessive deficit and in setting the adjustment path towards a country ’ s medium - term budgetary objective. such benchmarks need to be even more ambitious if a country ’ s debt exceeds the reference value of 60 % of gdp or there are fiscal sustainability risks. finally, the gap between the eu and national level must be closed. new procedures will not be sufficient if they are not solidly anchored at national level. binding commitments by member states to swiftly implement strong national budgetary frameworks are essential. major improvements are needed regarding the quality and independence of fiscal and economic analysis and the production of fiscal statistics. all these aspects should be contemplated as mandatory features in the foreseen directive on national fiscal frameworks. bis central bankers ’ speeches in the ecb ’ s view, the proposals meanwhile agreed do not go far enough. regarding the final result, we are encouraged by the fact that the european parliament has shown some ambition in its approach, particularly as regards greater automaticity and the broader and timelier use of sanctions. the room for halting or suspending procedures against those member states breaking the rules must be reduced. some other points of the parliament ’ s proposals also deserve a positive mention like the strengthening of the commission ’ s role in the procedures and an earlier and more gradual application of financial sanctions within the macroeconomic surveillance framework. it is also positive the support in the same framework for a clear distinction between member states belonging or not to the euro area. the requirements of avoiding negative imbalances must be more demanding for members of the monetary union. this type of distinction, making full use of the treaty ’ s new article 136, has to be applied in different domains, drawing the appropriate lessons of the crisis for the functioning of the monetary union. we hope that the ongoing negotiations over the legislative package will permit the texts to be significantly improved along these lines. the ecb is encouraged that the amendments proposed by the european parliament go in the direction of the significant strengthening of economic governance that we have called for. however, there are some important areas in which the texts should not be weakened. in particular, softening the stability and growth pact by introducing further exceptions or treating in a special way specific expenditure items, such as public investment, would create