Monetary Policy

One of the Central Bank of Iceland’s main objectives is to promote price stability. Price stability is defined as an annual inflation rate of 2½%, which is the Bank’s inflation target. The Bank is required to keep average inflation as close to that level as possible. The Bank’s most important tool in keeping inflation at the inflation target is its key interest rate; i.e., the interest rate on its transactions with other financial institutions. The Monetary Policy Committee (MPC) takes decisions on the application of the Bank’s monetary policy instruments. Successful monetary policy can foster greater prosperity domestically by ensuring price stability.

Monetary Policy Committee

The Bank’s Monetary Policy Committee takes decisions on the application of the Bank’s monetary policy instruments. Decisions by the MPC must be based on the Bank's price stability objective and a thorough assessment of economic and monetary developments and prospects.

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Inflation target

One of the Bank’s key objectives is price stability, defined as a rise in the consumer price index of 2½% over a twelve-month period. The Bank’s most important tool in keeping inflation at the inflation target is the interest rate on its transactions with other financial institutions.

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Macroeconomic forecasts

In order to achieve its price stability objective, the Bank must consider the future when setting monetary policy. This is referred to as forward-looking monetary policy. The Bank uses models to forecast the most likely developments in the economy over the next three years. The Bank also considers and assesses the key risks and uncertainties that could affect the economic outlook.

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Market transactions

The Central Bank conducts market transactions, among other things, in order to achieve its monetary policy objectives; these include transactions in the foreign exchange market, the currency swap market, the market for krónur, and the bond market.

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