flexibility to set their own monetary policy by leaning against movements in the capital account, as we have done here in iceland. in 2020, the central bank sold foreign currency in the amount of 144 b. kr. in order to prevent lower interest rates from causing excessive, unwarranted depreciation of the krona. it is also possible to imagine that, in the future, the central bank could absorb excess capital inflows into iceland if this should prove necessary. in the future, the central bank will need to use its balance sheet to ensure effective monetary policy transmission and ward off potential financial side effects. nevertheless, in the long run, the future of monetary policy lies in using a greater number of policy instruments and in coordination with macroprudential policy and financial supervision. here lie the opportunities for iceland ’ s tiny currency area. honoured guests : yet another anniversary is uppermost in my mind today : the one - year anniversary of the merger between the central bank and the financial supervisory authority – the reunification, we could say. the financial supervisory authority was once part of the central bank, called the banking supervision department. but in 1998 the banking supervision function was carved out of the 3 / 5 bis central bankers'speeches bank, right around the time the two state - owned banks were being prepared for privatisation. the senior management of the central bank protested vehemently against the separation, and i would like to quote from a letter on the topic, sent by the board of governors to the then minister of commerce in early 1998 : “ the board of governors is of the opinion that there are overwhelming arguments in favour of the central bank ’ s continued supervision of the activities of deposit institutions, other credit institutions, and securities market entities. the board of governors wishes to emphasise in particular that such supervision is a normal and appropriate part of the central bank ’ s activities. this supervisory role benefits just as much from its partnership with the central bank as various other bank activities do from partnering with banking supervision. ” if there is any single factor that foreign experts have identified as the main cause of the 2008 financial crisis, it is the fact that responsibility for and supervision of the financial system were spread across a large number of ministries and institutions, with the result that no single party had an all - encompassing overview, no single party was actually accountable, no single party had adequate power, and no single party had enough muscle to intervene. actually, in other countries where financial supervision had previously been hive

of the standard assumptions behind the forecast is an unchanged exchange rate from the forecasting day, and it should be borne in mind that it did not take into account the interest rate cut which was announced on february 10. the impact of the cut will be a marginally higher rate of inflation than was assumed in the forecast. it should also be mentioned that monetary bulletin contains an announcement about pending changes to rules on required reserves aimed at harmonising the operating conditions of icelandic credit institutions with those of comparable institutions in emu. to be implemented in phases this year, the new rules involve a considerable reduction in the credit institutions ’ required reserve from the present levels, thus entailing some easing of the monetary stance. broadly speaking, the central bank ’ s assessment and forecasts entail a fairly moderate rate of economic growth this year, unemployment of around 3½ % this year ( excluding the effects of new government measures in this area ) but falling somewhat next year, a minor current account deficit this year and next year – in particular caused by imports connected with the construction programmes in east iceland – and a very moderate rate of inflation. thus it can be said that the outlook is for good macroeconomic balance. as i mentioned earlier, monetary bulletin includes an in - depth assessment by the bank of the proposed power - intensive industrial projects in east iceland and conceivable economic policy responses to them. in this context it is important to remember that relatively little development will take place in east iceland this year and for most of next year. the effect will not begin to be felt to any extent until well into next year and the bulk of construction work will take place in 2005 and 2006. the main conclusion of the bank ’ s analysis is that even though this will be the largest construction programme in the history of iceland, it should be able to go through without disrupting the economy. however, this calls for cautious economic policy implementation. the central bank ’ s analysis shows that with a somewhat stronger exchange rate and higher interest rates than would otherwise have prevailed, and a tighter fiscal stance than would have been needed, inflation will remain inside the tolerance limits of the target, i. e. below 4 %, and that this will prevent the economic instability that the construction programme in east iceland would otherwise have caused. exchange rate developments and the fiscal input will be major factors in determining how much interest rates will need to rise. however, neither an exchange rate adjustment nor fiscal measures can entirely replace monetary measures, since the change in exchange