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

away by the government sector, it has vital implications for ensuring stability in the financial markets because the demand for funds from the non - government productive sectors of the economy has to be met simultaneously. fourth, india is still a bank - dominated system and about 70 per cent of our banks ( in terms of business ) are owned by the government. thus, we could have a situation when the objective of monetary policy and the objective of broader public policy dealings with banking converge, in which case the monetary policy could be very effective. sometimes, it could happen that the objective of monetary policy and the objective of broader public policy may not converge, in which case monetary policy may not be that effective. in other words, the effectiveness of the monetary policy depends not only on the actions of the monetary authority, but also on other public policy postures. this certainly complicates monetary management. of course, the issue of conflict of interest in public sector banking and government ownership is yet another issue. the issue of conflict of interest in private sector banks arises when the owner of the bank borrows from his own bank. the single largest source of borrowing for the government being the government - owned banks themselves, this conflict is rather apparent. fifth, one of the factors imparting rigidity to the interest rate structure in india is the administered interest rates, particularly on small savings instruments. in this context, administered interest rates fixed by the government on a number of small saving schemes and provident funds are of special relevance as they have generally offered a rate different from those on corresponding instruments available in the market, in some cases along with tax incentives. the administered interest rates significantly impact the level and allocation of savings. on the lending side also, there are some administrative prescriptions for banks. depending on how it is calculated, on both the savings and the lending sides, the administered structure of interest rate would apply to about 25 to 40 per cent. in this context, it is pertinent to note that the monetary policy mainly operates through interest rates and interest rate signals, and constraints posed by administered interest rates have to be duly recognized while dealing with issues relating to monetary policy transmission mechanisms. sixth, theoretically it is well recognised that monetary policy is generally a more effective counter - cyclical policy instrument than fiscal policy because interest rate changes can be made and reversed quickly. however, monetary policy adjustments may take longer than fiscal policy adjustments to affect aggregate demand. it is also recognized that fiscal policy contributes to broader - based stabilization through