similar, although interest rates have been – and still are – higher than in larger industrialised countries. this is quite at odds with what could be expected based on some of the discussion taking place in iceland. the fact is that long - term real rates in iceland are currently at their lowest for this entire period, apart from a short time in the midst of the economic crisis, when the real policy rate was held very low so as to stimulate the economy and presumably pulled longer - term rates downwards for a while. i have said that monetary policy had little to do with these developments. this does not change the fact that these developments have affected monetary policy, as they reflect in part the decline in short - term equilibrium real interest rates. monetary policy has therefore responded to this with lower nominal interest rates than would otherwise have been appropriate. nominal rates have fallen even further during this period, for three reasons. first of all, inflation and inflation expectations were brought to target levels in major industrialised countries in the last two decades of the 20th century ; therefore, it was not necessary to keep nominal and real rates as high as before. it could be said that the same development has taken place here in iceland in the recent term. second, global deflationary tendencies have been strong in recent years, following the inclusion of china and russia in the global trading system and due to technological advances and developments in international production and value chains. third, a pronounced economic slack in major industrialised countries after the financial crisis has led to much more accommodative monetary policy than would otherwise have prevailed in those countries. all of these factors combined have contributed to the current situation, where nominal central bank rates in leading industrialised economies are extremely low in historical terms. actually, many observers consider them dangerously low as regards their potential impact on financial stability and the efficacy of the financial system. what about iceland in this context? the central bank ’ s key rate is the interest rate that determines short - term market rates at any given time. in the recent past, this has been the rate on seven - day term deposits, which is now 5. 25 %, as chart 2 indicates. it is far below the average for the period since the adoption of the inflation target in late march 2001, in spite of the significant tension in the economy. this is a reflection of the progress made in the recent term in bringing inflation expectations to target. the bank ’ s key rate has been slightly lower on two occasions since the adoption of the

appreciation of the krona have yet to be transmitted in full. nonetheless, further tightening may be necessary over the next few months. comparisons with previous forecasts and various indicators suggest that since december the central bank ’ s policy rate hikes have by and large delivered a tighter stance. the central bank ’ s monetary policy is very much debated in society at large at the moment, which is natural given the great interests at stake. obviously i have closely followed discussions of monetary policy for a fairly long time and must admit that the debate in recent times has been more mature and bears witness to a deeper understanding of economic principles than before. it is normal for opinions to be divided over the central bank ’ s measures during tight stances such as the present. the central bank welcomes public debate and is ready to take part in it. i would like to use this opportunity to address a few points that have been raised in this debate recently. sometimes it is alleged that monetary policy is impotent in a climate of heavy capital inflows. claims are also heard that the central bank ’ s monetary policy measures only exert an influence through the exchange rate and have no effect on long - term interest rates, and absolutely not on indexed interest rates. certainly, a tight monetary stance does put significant upward pressure on the exchange rate, contributing to lower inflation in the short run. central bank policy rate hikes also have a very swift effect on the money markets, and interest rates on other instruments with maturities of a few months or years are soon influenced too. central bank policy rate decisions also have an impact on long - term interest rates, both indexed and nonindexed. all research in iceland and everywhere else confirms this, but because the effect is transmitted with a long lag, monetary policy must be forward - looking. interest rate decisions made today are not transmitted in full to long - term interest rates until one or two years hence. thus the debate often focuses on the short - term effects of monetary policy, but people need to be patient and bear in mind the impact which does not emerge until well into the future. the central bank does not have the slightest doubt that interest rate changes in iceland ultimately have the same effect as those in other countries, in other words that general economic principles apply just as much in iceland as anywhere else. when monetary tightening is beginning to have an effect and specific sectors of the economy bear the brunt, it is normal to ask whether there are no softer alternatives, which