, total assets of pension funds were equivalent to less than 20 % of gdp, and the ratio was even lower than 10 % in many countries, including germany, italy, belgium, austria, sweden and finland. by comparison, assets of norway ’ s government pension fund ( petroleum fund ) last year were equivalent to 60 % of gdp. one consequence is that the icelandic treasury ’ s future pension payments burden is negligible compared to most other industrial countries. of course this represents an enormous economic and social strength for iceland. the pension funds ’ huge assets also impose a great responsibility on their management, who must invest these resources securely and profitably. furthermore, relative to iceland ’ s economy, the pension funds are now at a size where they can have a massive impact on developments in the domestic financial sector. in recent years, icelandic pension funds have been consistently investing part of their disposable funds in foreign securities. they have considerable scope for making foreign portfolio investments, which by the end of march were estimated at almost 30 % of their total assets. holdings are mainly in foreign equity funds, but they have also invested in mixed funds and individual corporations. pension funds have also been major players in the domestic equity market. at the end of march 2006, their estimated holdings exceeded 200 b. kr. and constituted 16 % of their total assets. at the end of 2004, pension funds owned an estimated 12 % of all equities listed on iceland stock exchange. corporate lending by pension funds has also grown rapidly. it is vital for pension funds to exercise the utmost care in their domestic equity investments, and to be cautious about wielding the power that these investments grant them. likewise, diligence in corporate lending must be an important consideration for pension funds, to avoid an inordinate degree of risk. in my opinion, the pension funds ’ increased foreign investments, made strictly with their own interests in mind, are likely to affect currency developments favourably. when the krona remains strong for a prolonged period, pension funds are more likely to sell holdings denominated in it and invest those funds externally, with the effect of a stabiliser. and vice versa, they are likely to buy weak kronur after profit - taking, thereby contributing to a recovery of the domestic currency. in such a scenario, pension funds would serve a secondary role as a foreign exchange reserve, even if they were acting solely in the interest of their own clients. the central bank ’ s monetary bulletin, published

in the current climate it is natural to ask whether the central bank has adequate instruments to keep inflation in check. the answer is yes. but it cannot be denied that a strong counter - effect by other forces, actions or expectations will obviously make the central bank ’ s task more difficult. there are many reasons that inflation is above target and will remain there for some time, which i shall not dwell upon here. they have already been discussed in depth in the central bank ’ s publications, for example. with a sufficiently tight monetary stance, the central bank is convinced that the inflation target will be attained, and this is its goal. it will require a sufficiently tight stance for a sufficiently long time. the bank ’ s most recent interest rate decision must be seen in this light. the rationale behind it was explained in a press release issued by the central bank this morning [ may 18, 2006 ]. as i mentioned, the rise in the housing component explains the bulk of recent increases in the cpi. so it is not surprising that people have wondered whether the housing component should be included in the index on which the inflation target is based. the central bank has held this view, partly because changes in housing prices tend to be a leading indicator of private consumption and inflation, and also because over the years the cpi excluding the housing component has been more volatile than with it. including the housing component in the cpi in effect makes the index less volatile. of course it is natural to ask whether the right reference is being used for the inflation target and the central bank is obviously open for such discussion. however, it is absurd to change the cpi or strip it of certain components that become temporarily troublesome. the monetary policy framework and its implementation must not be changed except when the economy is in balance, and then only on the basis of long - term perspective, not vague short - term interests. financial stability over the past weeks and months, the icelandic financial sector has been in the spotlight domestically and, not least, internationally. not all of this publicity has necessarily been worth striving for. at the beginning of may the central bank published its annual financial stability report. it includes an analysis of macroeconomic stability and the position and strength of financial companies. the central bank ’ s overall finding now was that in spite of rapid expansion and the macroeconomic imbalances that need to be tackled in the coming years, the icelandic financial system is broadly sound. the position of the large commercial banks is crucial for the financial