2006 OECD Economic Surveys: Iceland 2006

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This 2006 edition of OECD's periodic survey of Iceland's economy finds strong growth but large macroeconomic imbalances. After a general review of the macroeconomic situation, the survey examines in a more detailed way implementation of monetary policy, improving fiscal management, furthering financial liberalisation, and adapting the education system to a changing environment.

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Improving the implementation of monetary policy

The objective of monetary policy is to stabilise inflation at about 2½ per cent. Actual inflation, however, has exceeded this target since 2004 and is expected to continue to do so for the foreseeable future. Monetary policy has reacted too sluggishly to the worsening outlook. Furthermore, increases in short-term nominal interest rates have not translated into comparable increases in real lending rates in the market. Higher interest rates and clear communication are needed to bring inflation back to the target and to strengthen the Central Bank’s inflation-fighting credibility.

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