Speech by the Chairman of the Supervisory Board at the Annual Meeting

Speech by Halldór Blöndal, Chairman of the Supervisory Board of the Central Bank of Iceland, at the Annual Meeting of the Bank, 28 March 2008

Mr. Prime Minister, honourable Ministers, Ladies and Gentlemen:

On behalf of the Supervisory Board, I welcome you all to this 47th Annual Meeting of the Central Bank of Iceland, and I declare the meeting convened. Following my introduction, the Chairman of the Board of Governors, Davíð Oddsson, will deliver his Annual Meeting address on behalf of the Board of Governors, whereupon Prime Minister Geir H. Haarde will address the meeting. Following the conclusion of business, I would like to invite our guests to enjoy the refreshments at the reception after the meeting.

At a meeting of the Supervisory Board earlier today, the Prime Minister ratified the Central Bank’s annual accounts for the year 2007 with his signature. The Annual Report for 2007 was issued today and will be available at the end of the meeting.

The annual accounts of the Central Bank of Iceland are prepared on the basis of rules set by the Prime Minister. Those rules were last updated in December 2005. According to its profit and loss account, the Central Bank of Iceland recorded a net loss of 1.2 b.kr. in 2007, compared with a profit of 11.9 b.kr. in the previous year. The substantial change between years is due primarily to exchange rate valuation differences. In 2007 there was an exchange rate loss amounting to 5.9 b.kr., as opposed to an exchange rate gain of 11.8 b.kr. the year before. This, of course, stems from the difference in the evolution of the exchange rate of the króna during the two years under scrutiny. Excluding exchange rate valuation effects, the Central Bank earned a profit of 4.7 b.kr. in 2007, compared with a profit of 32 m.kr. in 2006. The transfer to the Treasury totalled 2.3 b.kr. in 2007, as opposed to 16 m.kr. in 2006.

Interest income on both domestic and foreign assets increased during the year. The growth is due to increased activity, as well as higher interest rates than in the prior year. Interest expense also rose substantially in 2007. Net interest income totalled more than 6 b.kr. in 2007, as against 1.7 b.kr. in 2006. Operating expenses amounted to 1.6 b.kr. in 2007, as compared with 2 b.kr. the previous year. The drop is due primarily to the supplemental pension contribution paid in 2006 and the reduction in expenses for banknotes and coin in 2007.

In 2007, the Central Bank's balance sheet total increased by 155 b.kr. to 477 b.kr. at the end of the year. The considerable increase in assets is due almost entirely to increases in the Bank's claims on deposit money banks and other financial institutions in the form of collateralised loans, which increased from 147 b.kr. at year-end 2006 to 303 b.kr. at year-end 2007. On the liability side, notes and coin grew by 8.4% to 15.7 b.kr. at year-end 2007. The Central Bank's liabilities towards deposit money banks, in particular their current account deposits, rose from 43 b.kr. at year-end 2006 to 152 b.kr. at the end of 2007.

At year-end 2007, total Treasury deposits in the Central Bank amounted to 211 b.kr., which is virtually unchanged from 2006 despite the payment of equity capital contributions, which I will touch on later. Among the Treasury’s claims against the Central Bank at year-end 2007 were tied deposits in the amount of 26.8 b.kr., representing a portion of the proceeds of the sale of Iceland Telecom, which were deposited with the Central Bank at the time the company was privatised. Also among the government's claims against the Central Bank is a foreign-denominated bond that represents the value of a foreign loan taken in late 2006. The total amount of that bond was nearly 89 b.kr. as of the end of 2007.

At the end of the year, foreign assets comprised 34% of the Bank’s total assets, as compared with 52% at year-end 2006. Foreign and foreign currency-denominated liabilities represented 19% of the Central Bank's total liabilities and equity at the end of 2007, as compared with 31% at year-end 2006.

At the end of 2007, the Bank’s equity totalled 91 b.kr., as opposed to 48 b.kr. the year before. The increase is primarily a result of a 44 b.kr. equity capital contribution paid to the Bank by the Treasury in May 2007. The Chairman of the Board of Governors made special mention of this contribution at the Bank’s Annual Meeting a year ago. At year-end 2007, the Bank's equity corresponded to 18% of the balance sheet total excluding revaluation of fixed assets, as opposed to 13.4% at the end of 2006.

I have only mentioned the principal items in the Bank’s annual accounts. The Annual Report contains the accounts in their entirety, as well as the appropriate explanatory notes and a more detailed discussion of the Bank’s performance and balance sheet changes than I have provided.

The Bank’s staff underwent considerable change during the year. A total of 11 employees left the Bank or retired, and 16 were hired. Four of the new employees began in October 2007, when the National Debt Management Agency was closed and its activities, as well as four members of staff, were transferred to the Central Bank. At the end of the year, the Bank employed 115 members of staff, and full-time equivalent positions were 106.3.

Following the spring 2007 Parliamentary elections, a new Central Bank Supervisory Board was elected. Departing Board members were Helgi S. Guðmundsson, Ólafur G. Einarsson and Sigríður Stefánsdóttir. Elected to the Supervisory Board were Halldór Blöndal, Jón Sigurðsson, Erna Gísladóttir, Ragnar Arnalds, Hannes H. Gissurarson, Jónas Hallgrímsson and Jón Þór Sturluson. At the first meeting of the newly elected Supervisory Board, Halldór Blöndal was elected Chairman and Jón Sigurðsson Vice-Chairman. In the fall of 2007, Jón Þór Sturluson resigned from the Board, and Sigríður Ingibjörg Ingadóttir was elected in his place. The Supervisory Board held 20 meetings in the course of 2007. I would like to thank the members of the Board for a very satisfying collaborative relationship and a job well done. I would also like to thank the Board of Governors and the staff of the Bank for their extremely valuable contribution during the past year and for their excellent co-operation with the Supervisory Board.

The Central Bank’s task was complex during the past year and remains so in 2008, and its policy has been subjected to criticism. The Bank operates on the basis of an act of law passed in 2001 and a joint declaration issued by the Bank and the government that same year. The aim of monetary policy is to promote stable price levels, defined as 2½% inflation. Achieving that goal has proven problematic in recent years. The Central Bank has explained the reasons in detail, and there is no reason to repeat them here. The Bank has repeatedly emphasised in the strongest terms how vital it is for Icelandic households and businesses that inflation be brought into line. People of mature years think with apprehension back to the 1970s and 1980s, when inflation ran roughshod over the economy, feeding on itself like an untamed beast. Many – individuals and businesses alike – lost control of their finances. Unemployment was a looming threat, and living conditions deteriorated. We don’t want to go through that again. That is why our most pressing task is to reduce inflation and give no quarter in the fight to contain it.