transparency is the key to public trust and confidence. it means, among other things, that the central bank's financial supervisors take action where needed and their decisions are made public, so as to eliminate the suspicions and scepticism that could otherwise develop among other things. it is of vital importance to us all that we build up a sound and healthy financial market, no matter what role each of us may play in it. the application of macroprudential tools can also support monetary policy by curbing lending growth and indebtedness in the economy. this has been done successfully in iceland with the introduction of borrower - based measures. in the same manner, strong supervision limits risk - taking and bubble formation in the financial system and fosters greater resilience. the fruits of these efforts are clearly visible. the capital position of iceland's systemically important banks is strong, and arrears are limited despite high interest rates, as households'and businesses'debt ratios have fallen in recent years and are low, both in historical context and in comparison with neighbouring countries. honoured guests : monetary policy is not the only thing that has changed in iceland since 1979. practices in the labour market are entirely different now. new comprehensive private market labour agreements with a term of four years were signed this march. the new contracts should ensure that a wage - price spiral will not develop. this alone makes them an important element in achieving lasting price stability. they were concluded in the belief that the central bank will perform its legally mandated role and ensure price stability – thereby safeguarding purchasing power – over the term of the contracts. in fact, it is stated explicitly in the contracts that they will be terminated if inflation is above 4. 95 % in august 2025. inflation now stands at 6. 8 % in terms of the twelve - month rise in the cpi. thus it is still too far from the 2½ % target. the current inflation episode stems from the overheating of the economy, which grew by nearly 20 % in 2021, 2022, and 2023 combined – a rare occurrence in international context. policy rate hikes have cooled this growth down, as figures show that domestic demand growth has eased. even so, considerable pressures remain. the main source of concern, though, is that short - and long - term inflation expectations are still above the target. this gives rise to worries that the wage rises in the most recent labour market agreements will be passed through to prices. added to

bank inspectorate which has been built from the ground up in the bank and is closely linked to some of the bank ’ s other activities, for example in regard to a joint database. parliament is currently debating draft legislation, which calls for the creation of a new supervisory institution, which would combine all supervision of financial institutions. i cannot deny that the central bank is opposed to these ideas for reasons i discussed at this venue last year, and i shall not go into the issue in any more detail now. however, since the government ’ s wishes in this matter became clear the central bank has co - operated wholeheartedly with the ministry of commerce in preparing the best possible legislation in this area and in securing the necessary link between the central bank and the new supervisory institution and also to ensure that the central bank will have all necessary opportunities to guard a sound and effective financial system. in some central banks, which do not have supervision among their responsibilities, such as in sweden and the united kingdom, much work has been put into defining the relevant tasks of the central bank. the central bank is bound to seek models in these countries when it becomes clear that the bank inspectorate will depart. european monetary union there are now 9 months until the member countries of the european union, which meet the requirements of the maastricht treaty and become members of the european monetary union, adopt a new currency, the euro. there is now little to suggest that this will not happen on january 1, 1999 and the european central bank will be established this coming july 1. the central bank has thought it necessary to follow these developments closely, not least in order to be able to analyze the impact on iceland and the options available to iceland in the new environment. in june 1997, the central bank released a report european monetary union, creation and impact. the bank will release interim reports on this issue as the occasion warrants. at this stage, it is premature to say what impact the monetary union will have on icelandic exchange rate policy or on the options iceland will face. i will, nevertheless, say a few words about the subject as it appears from the perspective of the central bank. the outlook is now that 11 countries will form the monetary union at the outset. these countries account for only 33 percent of iceland ’ s external goods trade. the initial impact will therefore not be nearly as significant as has been suggested in the domestic debate. only when the united kingdom joins the monetary union will more than one half of iceland ’ s goods