Collected together on this page are summaries of all of the Central Bank's press releases and notifications on responses to the COVID-19 pandemic, as well as links to the notifications themselves. Further actions taken by the Bank and announced on its website may be affected to some extend by COVID-19. The Central Bank first announced changes to its operations on 10 March 2020, and a press release on the Bank's first response measures was issued a day later.
The Central Bank of Iceland’s pandemic response measures
The Central Bank of Iceland’s principal objective is to promote price stability, financial stability, and sound and secure financial activities. The global COVID-19 pandemic and the public health measures imposed in order to curb the spread of the disease have had enormous economic repercussions. In response to this situation, the Central Bank has taken a wide range of actions, including lowering interest rates, boosting domestic financial institutions’ access to capital, using the international reserves to mitigate exchange rate volatility, and commencing secondary market purchases of Treasury bonds.
Why lower interest rates?Since the pandemic struck, the Central Bank has lowered its key interest rate from 2.75% to an all-time low of 0,75%. Lower Central Bank rates enable credit institutions to lend money to households and businesses at lower rates. Reduced lending rates should lower borrowers’ debt service, thereby supporting a higher level of demand. In addition, lower interest rates could help borrowers to continue paying their debt even if their income declines.
Why increase financial institutions’ access to capital?The Central Bank has taken various measures to ease credit institutions’ liquidity position and provide them with greater scope to support Icelandic households and businesses. Among other measures, the Bank has lowered minimum reserve requirements, eased capital requirements by lowering the countercyclical capital buffer to 0%, and granted special temporary liquidity facilities in the form of collateralised loans. These measures ease credit institutions’ access to capital and make them better able to address increased arrears and loan impairment. This enables these institutions to increase their lending to households and businesses, as well as giving them greater scope to restructure distressed borrowers’ debt.
Why use the international reserves to mitigate exchange rate volatility?The Bank’s international reserves amounted to 816 b.kr. at the end of 2020. The Bank’s net foreign currency sales in the market totalled 132.7 b.kr. during 2020. The objective of using the international reserves as a policy instrument is to increase the stability of the foreign exchange market and improve price formation, for the benefit of Icelandic households and businesses. The Bank will continue to intervene in the market in order to mitigate volatility when it considers such intervention warranted.
Why buy Treasury bonds?Between March, when the Bank announced its Treasury bond purchase programme, and the end of 2020, the Bank bought Treasury bonds in the secondary market for a total of 7.6 b.kr. The purchases could range up to 150 b.kr., or 5% of GDP. The objective of the purchases is to prevent the increased supply of Treasury bonds from pushing market interest rates upwards, which would run counter to monetary policy objectives. This makes it possible to ensure that lower Central Bank interest rates are transmitted more effectively to households and businesses.