system now stands on much more solid ground. it is primarily in connection with the third challenge, of reintegrating iceland into international capital markets, that more work needs to be done. but even in this area we have made significant progress. gdp growth, a balanced economy, a treasury surplus, and the central bank ’ s foreign currency purchases have created good conditions for the liberalisation of the capital controls. the credit ratings of the sovereign and the commercial banks have improved. the sovereign regained access to foreign credit markets some time ago, and the banks have opened a crack in the door. but even though we have made significant progress, the game is not yet won. debt levels are high, rendering borrowers vulnerable to shocks, and the capital controls are still in place. iceland ’ s macroeconomic balance is good, but fragile. on this score, we face three relatively important risks : first, that the interactions between labour market unrest and the turnaround from output slack to a positive output gap could undermine price stability and turn the current account surplus into a deficit ; second, that lifting the capital controls could turn out badly, with negative implications for exchange rate stability, inflation, and financial system stability ; and third, that the global economic situation could turn against us. therefore, we must avoid complacency, and we must be vigilant if we are to safeguard our recently achieved stability and face down the three challenges that i have mentioned just now. in some respects, formulating monetary policy is complex at present, as it has been at times in the past. the central bank ’ s interest rates were lowered by 0. 75 percentage points in the final two months of 2014, in response to rapidly falling inflation and the decline of inflation expectations to the target. since then, inflation has dropped still further, falling below 1 % in december, triggering the submittal of a report to the government on inflation below the deviation threshold. even though inflation is now below 1 %, the central bank ’ s key interest rate has been unchanged at 4. 5 % so far this year. there are a number of reasons for this. first of all, the extremely low inflation rate is due partly to the abrupt drop in global oil and commodity prices in the second half of 2014. this drop could prove temporary, but even if not, it is beyond the scope of domestic monetary policy. furthermore, it can be assumed that real wages will rise if the decline in oil prices proves long - lived, but the impact

the outstanding foreign - denominated loans taken to finance them – by 65 b. kr. as of the end of february. but we mustn ’ t rest on our laurels ; we need sizeable reserves as we prepare to lift the capital controls. i mentioned uncertainty surrounding the estimation of potential fx outflows once the controls are lifted. but one thing is certain : if the failed banks ’ estates were given a green light tomorrow and could convert all of their kronur to foreign currency, and the same happened with the offshore overhang, there is no way we could safeguard stability, let alone bolster confidence, except perhaps after a long time has elapsed. the central bank of iceland has designed a model intended to assess the impact of various developments in the balance of payments over a long horizon, including capital account liberalisation measures. when applied to this instance, the model reveals that our entire foreign exchange reserves would be wiped out – and more besides – if they were used to shore up the exchange rate. this would never be done, of course, and therefore the currency would depreciate sharply. it is clear that if residents were free to exit at the same time, they would participate in the run on the currency, and confidence would evaporate quickly, leaving us with a new currency crisis to grapple with. of course, this is an extreme scenario in some respects, as the estates ’ isk assets, for instance, are not all liquid at this point in time, and a portion of the offshore kronur could be patient capital. but it gives an indication of the kind of problem we are dealing with. therefore, we need other solutions that safeguard stability and prevent additional burdens from being placed on the sovereign or the icelandic people. such solutions do exist, and a large group of experts – foreign consultants ; the task force for capital account liberalisation, which works for the steering committee on the capital controls ; and experts from the central bank and the ministry of finance and economic affairs – has been working hard on developing them in recent months. i would like to take a moment now and thank all of these people for their tireless efforts and excellent work. it would be premature to publicise solutions at today ’ s meeting. moreover, it is not within my purview to do so on my own. the liberalisation of the capital controls is a collaborative project undertaken by the central bank and the government, which actually means that elected representatives