the case in much larger economies. there is a tendency in iceland to forget this in discussions of economic policy. honoured guests : we are at a turning point with respect to monetary policy implementation. for most of last year, inflation and inflation expectations were well above the inflation target, and the economic recovery was gaining momentum, while inflation forecasts suggested that it would remain above target for a sustained period, provided that the exchange rate remained close to the level prevailing at the time. it would have been possible to conclude from this that the monetary stance was too loose. actually, several critics maintained that the monetary stance was too tight, but economic developments have shown no signs to support bis central bankers ’ speeches that argument, nor is it consistent with common measures of the appropriate stance of monetary policy. the monetary policy committee considered the monetary stance sufficient to bring inflation back to target in the near future. in february, we were gratified to see inflation subside to target for the first time since early 2011. as far as monetary policy is concerned, there are three factors that have contributed to this achievement. the first is the interest rate hikes between august 2011 and november 2012, a response to the foreseeable inflation spike following the spring 2011 wage settlements. although controversial at the time, these rate hikes have proven their value in containing inflation without derailing the economic recovery. second, the monetary policy committee ’ s warning – that the same would happen this year if wage increases should prove excessive – appears to have been credible, which probably would not have happened without the previous rate increases. third, the foreign exchange market intervention policy introduced by the bank in mid - may has proven effective. the outlook is for inflation to stay close to target this year if the krona holds relatively stable. this positive outlook is due to a number of factors : favourable inflation developments during the first two months of the year, signs that wage cost increases have been smaller in the recent term than previously thought, the fact that the recent wage settlements – which provided for pay increases consistent with the inflation target – appear to have set the tone for subsequent wage negotiations, and the fact that global inflation looks set to be somewhat lower than previously forecast. looking beyond this year, however, inflation could rise again when the slack in the economy disappears and the effects of increased investment and the government ’ s debt relief measures on domestic demand come to the fore. the impact this has on inflation will depend on how inflation and inflation expectations develop this year, and on

the road to the future. the inflation target that we observe now is a function of much more than merely keeping inflation at bay. the policy centres on setting the right ground rules between democratically elected representatives, on the one hand, and experts or officials, on the other. and it rests on the foundations of a simple division of labour : elected representatives define monetary policy objectives, and the central bank has the independent power to execute policy in the pursuit of those objectives. in this context, the central bank can be viewed as an independent contractor engaged by the people of iceland. the ground rules of inflation targeting have proven to be good ones for democratic countries, as inflation targeting demands transparency and public accountability, in line with the precepts governing an open society. yes, inflation - targeting central banks work on a public stage and must be able to participate in public discourse in a dedicated and resolute way. in the final analysis, each is judged according to their actions. honoured guests : there is no doubt that inflation targeting is the future for monetary policy in iceland, as it is for other countries with monetary independence, even though targets may be modified along with the tools used to attain them. there was a time when it was believed that central banks could achieve their objectives by wielding a single weapon : seven - day interest rates. it was also believed that central banks should think only about the transmission of monetary policy to the real economy and let the financial system alone in other respects. in the narrowest sense, the task in hand was inflation, not asset bubbles. but this narrow policy was doomed to crash and burn, here as well as elsewhere. monetary policy has been reformed and strengthened since then, and is sometimes referred to as inflation targeting - plus. in may 2015, london business school professor helene rey published an influential paper bearing the title dilemma not trilemma : the global financial cycle and monetary policy independence. rey argued that, because of financial integration, independent monetary policy was actually no longer an option for small currency areas unless it was possible to manage the capital account directly or indirectly, no matter what exchange rate regime was pursued. the chain of events is familiar to all of us : as soon as a small central bank applied its policy instruments in an effort to cool down the economy – such as by raising interest rates – it would open the floodgates to a tidal wave of capital inflows that would cause the economy to flounder. and by the way, in this context nearly all