inflation is expected to run at 4. 3 % between 2000 and 2001 and 4. 6 % from the beginning to the end of the year. next year it is forecast to slow down to 2. 7 % from the beginning to the end of the year. interest rates the main objective of the central bank of iceland, like those in many other countries around the world, is to promote price stability. an intermediate objective has been to secure the value of the krona. to do so, the bank applies its policy rates, namely the rates of interest that it sets for its transactions with credit institutions. in a scenario of overheating and inflationary risks, the central bank raises its interest rates, as it has been doing in recent times. the bank already took such action in the second half of 1997 and raised interest rates fairly rapidly in 1999 and 2000. over these two years, the central bank raised its interest rates seven times in all, by a total of 3. 6 percentage points. the policy rate is now 11. 4 %, which is very high by international comparison. however, under certain circumstances interest rates have been this high or even higher in various other industrialised countries. broadly speaking, these interest rate rises served a double purpose. firstly, they were aimed at influencing the exchange rate differential with abroad, thereby exerting a direct impact on capital inflows and supporting the exchange rate of the krona. the other purpose was to contribute towards higher interest rates at credit institutions and thereby reduce the expansion in their lending. experience shows that the impact on lending will emerge eventually. all these measures were aimed at reducing consumption and investment. there are many signs that the central bank's interest rate rises are producing results in the form of less activity in the areas of the economy which are most sensitive to interest rates. had the central bank not reacted in this way, it is quite certain that overheating of the economy would have produced a much higher rate of inflation than iceland has known in recent years, with corresponding consequences for the economy. the central bank's tight monetary stance has been quite widely discussed in iceland. questions raised have included its impact on the current account deficit and whether monetary policy was actually achieving its set aims, given unrestricted access to foreign capital and the insensitivity of households and businesses to interest rate changes. the central bank has made special studies of the impact that interest rate rises have on the real exchange rate and current account deficit. research suggests that,

on primary markets. this was reflected in the sharp reduction in funds requested by spanish banks from the eurosystem. at end - november 2010, funding from the ecb, which in july 2010 stood at €150 billion, fell back to €65 billion. this means that the spanish banking system absorbs 12 % of the loan from the european central bank, a proportion fully commensurate with its size and importance in the euro area and which represents 2. 5 % of its balance sheet. the immediate future : consolidating the measures taken and putting the reforms on a firm footing in recent weeks international financial market dynamics have continued to be influenced considerably by the high degree of risk aversion and by fragile confidence levels. there has been a resurgence of the doubts – first seen in the case of greece – about the solvency of euro area member states. the uncertainty over the euro area ’ s fiscal sustainability cannot be explained merely by the economic downturn and its impact on public finances. the measures taken by authorities to avoid the collapse of the financial system have involved, in the case of ireland, guaranteeing the funds lent to the banking system by depositors and wholesale investors. markets are suspicious about the ability of certain small states, with relatively large banking systems, to meet these commitments. the european union has come to the aid of ireland, which has experienced problems precisely because it used substantial amounts of public funds to shore up a banking system bloated with real estate assets, particularly offices and houses in the dublin area. in spain the situation is very different as regards both the public sector and the banking sector. despite the substantial rise in the budget deficit in 2008 and 2009, public debt as a percentage of gdp remains relatively small in comparison with the euro area average, which is 20 percentage points higher. furthermore, the spanish state is committed to ending next year with a deficit of 6 %, more than 5 percentage points lower than in 2009. as for the quality of bank balance sheets, it is well known that non - performing loans have increased in recent years, and also that lending to the construction and real estate development sector was excessive. however, the stress tests have shown not only that banks have the capacity to absorb potential losses arising from extreme and highly unlikely scenarios, but also that most balance sheets comprise healthy assets in the various consumption and investment segments of the spanish economy. despite these fundamental differences, the climate of uncertainty makes it advisable to reaffirm the adjustments promised by