Special measures to reduce demand pressures

Following the agreement between the Confederation of Employers and the Confederation of Labour last week, it is important that the Government contributes to the effort of quickly bringing down the rate of inflation. Although the flexibility in fiscal finances is limited in the short run, it is evident, as has recently been pointed out by international institutions and credit rating agencies, that fiscal policy measures can help in reducing demand pressures, both directly and indirectly. This applies to public investments, both of the state as well as municipalities, as well as to the Housing Finance Fund.

In light of the above, the Government has decided to the following, upon the proposal of the Prime Minister:

1.      As of the 1st of July, the maximum lending ratio of the Housing Finance Fund will be temporarily reduced from 90 per cent to 80 per cent, and the maximum loan amount from 18 to 17 million krónur. The credit service of the Housing Finance Fund will henceforth be limited to one housing unit per purchaser or builder, so that the same person can not borrow on the basis of more than one housing unit from the Fund except in special circumstances.

2.       Tenders and the commencement of new state investment projects will be postponed. This measure shall be temporary but not subject to a particular time limits. Further decisions will be subject to discussion in accordance with item 3 below.

3.       Discussions will be held with the Association of Municipalities and the largest municipalities in the country to review their investment plans with the objective of reducing their investments this year and next. Large joint investment projects of the state and the City of Reykjavík will be subjected to a special review.

                                                                                                   Reykjavík, June 27th 2006