Monetary policy should be retained unless there are substantial risks.

The framework for inflation targeting played an important role in the policy response to the pandemic. However, the recent increase in inflation poses a monetary policy challenge. While inflation expectations remain anchored, and inflation is expected to return to its target without further policy measures, due to the high degree of uncertainty, policy decisions on vigilance and data would remain vital. The use of unconventional monetary policies is not currently warranted, as there is still room for policy rate relief if needed. As a result of the pandemic subsidy, CBI should also reduce its foreign-exchange presence gradually. دليل

The financial system has been in a strong position in the crisis, but emerging risks must be addressed. Capital and liquidity buffers remain well above requirements, enhancing their ability to withstand further shocks and the expected deterioration of their loan portfolios. Protecting the favorable financial positions of banks however requires close monitoring of emerging risks. Classification and provision for impaired business borrowers, especially in the tourism sector, must be paid close attention and viable businesses should be effectively rehabilitated. The ongoing rise in real estate prices and rapid growth in bank lending pose risks which have to be mitigated by macro-prudential measures targeting the repayment capability of borrowers and the exposure of banks to mortgages. Addressing these risks will also provide banks with free space to support business credit growth if economic insecurity falls.

Iceland's architecture of financial supervision is undergoing a major transformation. The effective management of the current crisis highlights the merits of the recent merger between the CBI and the supervisor of the financial sector. Coordination between the Committee on Monetary Policy, Financial Stability and Financial Supervision of the CBI has worked well, support the credibility of monetary policy and effective deployment of financial stability instruments. In order to ensure that the powers and resources of the central bank and its employees' legal protection are in harmony with the expanded responsibility of the CBI, a framework should be continuously evaluated, including in the upcoming first review of the new architecture. The forthcoming partial privatization of a state-owned Icelandic bank also requires vigilance in order to maintain high quality ownership. Finally, work must continue to show that the AML/CFT framework has steadily improved its effectiveness.

Structural policies should aim to diversify the economy and reduce scarcity.

A more diverse and sustainable growth strategy would foster the pandemic's structural transformation. Although tourism is systemically important, the crisis stresses the need to expand other sectors and to promote growth in knowledge-based sectors. The recently adopted policy on innovation is to be welcomed. A comprehensive economic recovery plan should seek to make the economy more resilient to major shocks and focus on three priorities:

Promoting a secure and sustainable tourism industry. In the short term, domestic and international confidence that Iceland is a safe tourist destination will enhance tourism. Strict health and hygiene measures in Iceland, including protocols for screening international travelers, strive to achieve this objective. Improved price competitiveness, land infrastructure and environmental sustainability could help make tourism as a whole more resilient and sustainable in the medium term.

o Economic diversification. The creation of a new growth-friendly environment would help Iceland's economic base. Continued support for innovation and digitisation can improve Iceland's already high digital skills and increase the ICT sector's share in the economy. It would also encourage investment and innovation to reduce the regulatory burden on start-ups and FDI restrictions. A review of the collective bargaining framework could help to align salary growth with productivity, foster competitiveness and jobs in diversified economic activities.