The Icelandic economy has been subjected to unprecedented turbulence in the past few weeks. The Icelandic banking system has not been able to withstand the trials it has faced as a result of difficult market conditions, global deterioration of confidence in economic affairs, and domestic risk appetite.

A variety of jobs have disappeared virtually in the blink of an eye, demand has declined precipitously, and by all measures, expectations are at a low ebb. The impact of the collapse of the banking system will be extremely burdensome and the accompanying economic contraction very sharp.

Preliminary forecasts are coloured by these factors.

The Board of Governors has engaged in informal discussions with representatives of the private sector, as well as with a number of other parties, and has reviewed this grave situation.

As a result, the Board of Governors has decided to lower the policy interest rate by 3.5% effective immediately. The policy rate will be 12%. The next policy interest rate decision date is November 6, 2008.

No. 37/2008
October 15, 2008