Seven-day and three-month collateralised loans.
For quite a while, seven-day collateralised loans were the Bank's main policy instrument. The interest rate on such loans is at the centre of the interest rate corridor. On 22 April 2020, the Bank resumed temporary issuance of collateralised loans. The Bank may grant loans for both shorter and longer periods, but all loans that it grants are collateralised, the Bank may not loan funds except against collateral in securities that it deems acceptable.  

Reserve requirements
The Central Bank imposes minimum reserve requirements on counterparties, as one of its monetary policy instruments. The rules in effect are the Rules on Minimum Reserve Requirements, no. 585/2018, with subsequent amendments no. 1218/2019. Reserve requirements are satisfied via financial institutions’ reserve accounts with the Central Bank. The minimum reserve requirement is a calculated as a percentage of the reserve base, which comprises deposits, plus bonds with a residual maturity of two years or less and issued by the financial institution concerned. The calculation is based on the average reserve base for the two months immediately preceding. The reserve amount is the requirement that an entity subject to reserve requirements must maintain on a daily basis over the reference period (reserve maintenance period), which is from the 21st day of the month through the 20th day of the following month. The minimum reserve requirement divided into a fixed reserve requirement and an average maintenance requirement. The fixed reserve requirement obliges entities subject to minimum reserve requirements to hold a specified amount in a separate reserve account with the Central Bank at all times. When the Central Bank imposes an average maintenance requirement, the financial institution can adjust its fulfilment of the reserve requirement to short-term changes in its payment flows. But this does not change the fact that, over the maintenance period, a specified minimum balance must be held in the reserve account with the Central Bank – a balance that the institution would otherwise have been able to allocate to other uses.
Beginning on 21 March 2020, the minimum reserve requirement is 1% of the reserve base, and only the fixed reserve requirement is imposed. On 11 March 2020, the Bank’s Monetary Policy Committee decided to lower the average reserve maintenance requirement from 1% to 0% in order to ease the banks’ liquidity and give them greater scope to respond to changes in Iceland’s economic situation.
In June 2018, the structure of reserve requirements was changed, and the requirement was split into two parts – a fixed non-remunerated 1% reserve requirement and a 1% interest-bearing average maintenance requirement. Until then, the entire reserve requirement had taken the form of an average interest-bearing reserve requirement. The change was made in order to reduce the cost to the Central Bank of implementing monetary policy.
In September 2015, it was announced that minimum reserve requirements would be doubled, from 2% to 4%, effective 21 October 2015. This was done to facilitate the Central Bank’s liquidity management in the wake of large-scale foreign currency purchases by the Bank and due to the settlement of the failed banks’ estates. In December of that same year, the reserve requirement was lowered to 2.5% in order to mitigate the liquidity impact of the stability contributions made during the post-crisis settlement. Plans to lower the requirement back to 2% in connection with auctions of offshore krónur were implemented in June 2016.

More information about reserve ratios

Statistics on minimum reserve requirements can be found here

Secondary market purchases of Treasury bonds.
According to Article 20 of the Act on the Central Bank of Iceland, no. 92/2019, the Bank may purchase or sell Government-guaranteed securities or other sound securities in the secondary market so as to achieve its monetary policy objectives. To that end, the Central Bank purchases bonds in the secondary market, in accordance with the statement issued by the Monetary Policy Committee on 23 March 2020. The objective of the purchases is to ensure monetary policy transmission throughout the yield curve, so that the more accommodative monetary stance is transmitted normally to households and businesses. The transactions commenced in May 2020, and the Bank has full flexibility to adjust the amounts, frequency, and execution of the purchases in order to ensure maximum efficacy.

Foreign exchange market transactions
The Central Bank may conduct transactions in the interbank foreign exchange market if it wishes to do so. The Bank has traded in the market in order to expand its international reserves, and it conducts trades in order to promote the attainment of the inflation target declared in 2001. In May 2020, the Bank’s Monetary Policy Committee announced a policy of increased intervention in the foreign exchange market, and the Bank has been an active market participant since then. If the Bank buys foreign currency, the amount of krónur owned by market makers increases, and if the Bank sells currency the amount of krónur owned by market makers decreases.  As a result, frequent foreign currency purchases affect the Bank’s market activities.  The Central Bank publishes interbank foreign exchange market turnover figures on the Statistics pages of its website.

The Central Bank has other policy instruments at its disposal, chiefly to include the following:

Repurchase agreements (often called repo transactions) are agreements between two parties concerning the purchase or sale of securities. Securities eligible for repo transactions are the same as those that are eligible for Central Bank loan facilities. A repo agreement has a predetermined maturity date, at which time the transaction is reversed. The Central Bank has not engaged in such transactions.

Certificates of deposit (CDs) are securities that the Central Bank can issue and sell to counterparties. CDs are issued in dematerialised form by a securities depository. The terms are determined for each issue. CDs have been issued both before and after autumn 2008

One-month term deposits. The structure is much the same as that for seven-day term deposits. Central Bank counterparties may submit bids to the Bank if they wish to participate in auctions of term deposits. The Bank notifies counterparties of the total amount available and the maximum bid amount. Participants submit bids specifying amount and interest rate. All participants in the auction are allocated amounts at the interest rate accepted for each auction. Bids featuring interest rates above the accepted rate are rejected. One-month term deposits were offered from June 2014 until June 2020.