Modifications to monetary policy instruments
At its recent meetings, the Central Bank’s Monetary Policy Committee (MPC) has discussed altering the Bank’s monetary policy instruments. The objective of the proposed changes is to enhance the effectiveness of the Bank’s liquidity management and, insofar as is possible, to promote greater efficiency as regards its balance sheet. These modifications should also prepare for the changes in the monetary policy environment upon the sale of Central Bank of Iceland Holding Company (ESÍ) assets and the liberalisation of the capital controls. At its 20 May 2014 meeting, the MPC approved the Governor’s proposal for modifications in this direction. Further changes are under analysis within the Bank and could be implemented at a later date.
In accordance with the above and with Article 24 of the Act on the Central Bank of Iceland, the MPC has decided to change the Bank’s monetary policy instruments as follows:
• Weekly auctions of 28-day certificates of deposit will be discontinued. Instead, financial institutions that engage in transactions with the Central Bank will be offered two types of term deposits that will be eligible as collateral for Central Bank facilities.
• As a rule, the Bank will not offer deposits and collateralised loans at the same time.
• From now on, the Bank will set ceilings on the collateralised loans or term deposits available at any given time.
• Each week, term deposits maturing in one week will be offered at a fixed interest rate.
• Each month, on the first business day for regular facilities, term deposits with a maturity of one month will be offered in an auction. Financial institutions will place bids for both the amount and the interest rate. The auction will be structured with a single-price format; i.e., all accepted bids will be offered at the highest interest rate among accepted bids. The first auction will be held on 4 June 2014.
Further information can be obtained from Már Guðmundsson, Governor of the Central Bank of Iceland, at tel: +354 569-9600.