18 June 2007

New rules on Central Bank of Iceland facilities for financial undertakings and changed presentation of the policy rate

New rules on Central Bank of Iceland facilities for financial undertakings and on current accounts in the Central Bank of Iceland have been published in Icelandic on the Bank’s website today, together with an announcement on Central Bank of Iceland interest rates. The rules will be published in English translation after they enter into force on June 21. Several of the changes entailed by the new rules were announced in Central Bank of Iceland press release no. 8 on May 16 this year. Furthermore, the Central Bank’s regular facilities for financial undertakings, which have been provided on Tuesdays, will in future be provided on Wednesdays, as of Wednesday June 27.

As announced on May 16, it should be underlined that the Central Bank of Iceland’s policy rate is now presented as a 13.30% nominal interest rate instead of 14.25%, which is the corresponding annual rate of return. No change in policy rate is implied by this new numerical presentation. As stated in the press release of May 16, the policy rate that the Central Bank has published in its interest rate announcements until now has strictly speaking been the annual rate of return and not the nominal interest rate. It has now been decided that all Central Bank interest rates will in future be stated and announced as nominal rates. When interest rates are calculated more than once a year, this means that the nominal interest rate will be lower than the yield. Since December 2006, the yield on Central Bank loan facilities for financial companies has been 14.25% p.a. The Central Bank’s policy rate has generally been referred to as 14.25%. Most central banks adopt a different approach and state their policy rates in nominal terms. One consequence has been that comparisons between the policy rate of the Central Bank of Iceland and other central banks has been misleading. For example, the nominal rate corresponding to an annual return of 14.25% on Central Bank loans against collateral is 13.30%. Thus in comparing the Central Bank of Iceland’s policy rate with that of other central banks, the logical figure to use would currently be 13.30% and not 14.25%.

In other words, the change announced now does not involve a change in the policy rate or monetary stance, only in their numerical presentation.

For further information contact Eiríkur Guðnason, Governor of the Central Bank of Iceland, or Sturla Pálsson, Director of International and Market Operations, tel. +354-5699600.


No. 12/2007
June 18, 2007