Central Bank of Iceland: Press Conference on May 16, 2007

The following is an English summary of the questions and answers after the formal introduction by the Chairman of the Board of Governors on the interest rate decision and the Deputy Chairman on amendments to the rules on transactions with the Central Bank at the Bank’s Press Conference on May 16, 2007

Question: Is this interest rate decision, i.e. unchanged policy rate, commensurate with the Central Bank’s projected path for the policy rate?
Chairman of the Board of Governors: Yes, it is fully commensurate with the Bank’s projection and in the policy statement issued today we state that economic developments have been more or less in line with the forecast in the latest Monetary Bulletin. Although the Board of Governors did not formally commit itself to the interest rate projection presented in the Monetary Bulletin, it is quite evident that, barring considerable changes from the forecast, it is likely that the interest rate projection will hold.

Question: Referring to recent discussions on the interest rate differential and the strong króna and large foreign investment in Icelandic krónur, are the hands of the Central Bank tied in its policy decisions because of foreign investors in Icelandic krónur?

Chairman of the Board of Governors: No, the hands of the Central Bank are not tied in any way in this respect. The Central Bank seeks to promote balance in the economy. The principal task is to promote a low rate of inflation, to contain it over the long term. It may well be that a corollary of the Bank’s policy is that foreign investors see opportunities in exploiting the interest rate differential that results from it, but that is not the guiding light of the Central Bank.

Question: Following the elections to Parliament, a new government will now be formed. What impact can the decisions and policy of the Government have on the policy rate of the Central Bank and inflation prospects?
Chairman of the Board of Governors: That is difficult to say but the main factor is that the Central Bank will maintain its policy irrespective of what government is formed. The Bank of course expects that the decisions of the government will be compatible with the policy which the Central Bank is legally mandated to follow.

Question: What expectations does the Central Bank have about a new government?
Chairman of the Board of Governors: The Central Bank expects the Government to have the same broad objectives as the Bank, i.e. to ensure that its decisions and actions do not undermine stability, because we think that economic stability is the basis for the good things that people will want to do. If stability is not achieved then economic growth will not be as well founded as otherwise and will offer more limited opportunities to improve welfare and other such things. In our view, the foundations of economic growth must be solid and based on stability and low inflation.

Question: When do you expect to be able to start lowering the policy interest rate?
Chairman of the Board of Governors: In our forecast presented at the end of March we indicated that we might be able to begin lowering the policy rate before the end of the year. The Board of Governors conditioned this expectation and it is appropriate to emphasise that the interest rate path could in principle move in either direction from that projected in March. If conditions deteriorate, then the policy rate might have to remain high longer than otherwise or even be raised further. If conditions improve beyond what the Bank’s forecast indicated, then the decisions of the Board of Governors might be different and the policy rate lowered earlier than otherwise.

Question: Inflationary pressures seem to be somewhat greater than you anticipated in the March forecast. If that development continues could earlier projections change?
Chairman of the Board of Governors: Yes, as we in fact point out in our policy statement today. If conditions deteriorate, then the Bank might have to respond, and if it needs to respond then it will do so. We are not saying that it will happen but it is correct that inflation pressures have been somewhat greater than even we expected in March. Nevertheless this has not led us from the path that we projected then.