Monetary Policy

The Central Bank of Iceland’s principle objective is to maintain price stability and to keep inflation as close as possible to the inflation target, which is set at 2½%. The Monetary Policy Committee (MPC) takes decisions on the Bank’s interest rates, which are transmitted to the economy and affect price developments. Successful monetary policy can promote increased economic well-being in the country by ensuring price stability. In this way, it can also mitigate economic volatility. Irresolute and unfocused monetary policy exacerbates uncertainty and ultimately provides a poor anchor for inflation.

Inflation target

The Central Bank’s principal objective is price stability, which is defined as a 2½% rise in the consumer price index (CPI) over a twelve-month period. Monetary policy is applied so as to keep inflation as close as possible to the inflation target, on average. The Bank’s most important tool in keeping inflation at the inflation target is its interest rates in transactions with other financial institutions.

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Economic forecasts

Forward-looking monetary policy is the foundation for the Bank’s achievement of its principal objective, which is price stability. In order for monetary policy to be forward-looking, the Bank must assess the short- and long-term economic outlook and the key uncertainties that could affect its forecasts.

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Monetary Policy Committee

Decisions on the application of the Central Bank's monetary policy instruments are taken by the Monetary Policy Committee. The Monetary Policy Committee comprises the Governor and Deputy Governor of the Central Bank, a senior Central Bank official in the field of monetary policy, and two external experts in economics and monetary policy.

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Market transactions

The Central Bank engages in market transactions in order to achieve its monetary policy objectives. The Central Bank’s market operations entail general supervision of and participation in the foreign exchange market, the market for currency swaps, and the market for krónur. The Bank also keeps abreast of the regulated securities market without directly supervising it. The Bank may trade in these markets if it considers such trading consistent with its objectives.

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