New exchange rate indices

A new method for calculating the effective exchange rate indices published by the Central Bank of Iceland will be introduced tomorrow, December 1, 2006. The main purpose of the change is to allow the currency baskets used in these calculations to reflect as closely as possible the composition of Iceland´s foreign trade in both goods and services, by increasing the number of component currencies. Calculation of the baskets has been simplified and made more systematic, and also brought more closely into line with established international practice. It is planned to cease updating of the currency basket that has hitherto been used to calculate the official exchange rate index and discontinue publication of this index at the end of 2008. A number of new effective exchange rate indices have been calculated. The weights differ considerably from those used for calculation of the official exchange rate index. In particular, the weight of the US dollar has been reduced. The baskets used to calculate the new indices are based on Iceland´s foreign trade over the preceding year and will be updated annually every September. Further information on the new indices will be posted on the Central Bank website, including tables showing the new baskets based on foreign trade in 2005 and changes from previous baskets. Time series calculated retrospectively for a number of years using the new indices will also be accessible on the website.

For further information, contact Daníel Svavarsson at the Economics Department of the Central Bank of Iceland, (daniel.svavarsson@sedlabanki.is), tel. +354 569-9692.

No. 43/2006
November 30, 2006