bite, and it must have financial stability under control. we experienced this during the leadup to the financial collapse, as the central bank had no power to act. an unfortunate thing happened in 1998, when the banking supervision function was carved out of the central bank, right around the time the two state - owned banks were being privatised. at the time, the central bank ’ s senior management objected vociferously to this bifurcation, as i mentioned in my speech at last year ’ s annual meeting. if there is any single factor that foreign experts have identified as the main cause of the 2008 collapse, it is the fact that responsibility for and supervision of the financial system were spread across a large number of ministries and institutions, with the result that no single party had an all - encompassing overview, no single party was actually accountable, no single party had adequate power, and no single party had enough muscle to intervene in the course of events. but now, iceland ’ s financial supervision and other central bank activities have joined forces again after a separation of 22 years, and the merger has been a successful one. now we have a single institution that is responsible for financial stability and has all of the necessary information on the financial system and developments in systemic risk within it. the future of monetary policy lies in the expansion of the policy toolbox and the coordination of monetary, macroprudential, and supervisory policy instruments within a single institution. here lie the opportunities for iceland ’ s tiny currency area. the central bank will also need to use its balance sheet – such as by intervening in the foreign exchange market – to ensure effective monetary policy transmission and ward off potential financial side effects. we have been successful in this regard. i would also like to stress that the application of the bank ’ s policy instruments and powers is in the hands of three committees comprising internal and external members. each of the committees has clearly defined objectives, as well as policy instruments to achieve them. they take independent decisions that they must account for publicly. this arrangement ensures both transparency and distribution of power. in 2021, the central bank took the step of capping loan - to - value ratios on residential mortgages at 80 %. it also capped debt service - to - income ratios at 35 %. we are now seeing signs that these measures have begun to make an impact. by wielding its policy instruments, the central bank can dampen demand for real estate, prevent speculative activity, and keep households from taking excessive risk.

but there is also a shortage of residential property in the capital area, and real disposable incomes have risen steeply. this will naturally contribute to house price inflation. iceland has plenty of land at its disposal, and if we use it sensibly, we will not need to wait too long for the market to rebalance. honoured guests : last may, the central bank of iceland was the first western central bank to raise interest rates after the steep rate cuts early in the pandemic. the bank ’ s policy interest rate is now 2. 75 %, where it was pre - covid, and has therefore risen by 2 percentage points in the past twelve months. there is no doubt that these rate hikes were unavoidable, and it will probably be necessary to raise rates further so that we can bring inflation into line. the central bank is concerned for households ’ wellbeing – it cannot allow inflation to become entrenched once again. the sooner and the more decisively we take action, the less costly it will be to maintain the stability that will benefit us all. in spite of all the powers the central bank has been granted, it cannot ensure stability unless others work towards the same goal – not least the labour market. otherwise, we run the risk of being sucked back into the all - too - familiar maelstrom of spiralling wages and prices, to the detriment of all. it would be even worse if that spiral were reflected in demands that policy rate hikes be matched with pay rises. the fact is that the central bank is responsible for ensuring a stable price level, and for safeguarding the value of the wages negotiated in labour market agreements. yes, comprehensive wage agreements are actually written on the back of the central bank governor, because it is the bank ’ s role to make sure that those wage agreements are economically viable. it is as clear as day that we icelanders cannot expect to use wage rises as a response to imported inflation, which is inescapable, stemming as it does from pandemic and war, from disease prevention measures and economic sanctions, and from rising commodity prices and the disruption of multinational production chains. we have to accept it as we do any other misfortune. otherwise, we will find ourselves back in the 1970s. i do not mean by this that icelandic wage - earners must make sacrifices. no, i certainly do not want icelanders to have to sacrifice ; i want them to have