Key interest rates

The Central Bank conducts monetary policy largely by affecting money market interest rates, mainly through the interest rates on the facilities it offers to credit institutions, which then affect other market rates. The Bank’s key interest rate (sometimes called the policy rate) is the rate on these facilities that is the primary determinant of short-term market rates and therefore of the monetary stance. At present, the Bank’s key rate is its seven-day term deposit rate.

 

Changed circumstances in the wake of the financial crisis

The interest rate that has the strongest effect on short-term market rates and is therefore considered the Central Bank’s key rate may change from time to time. Prior to the financial crisis of autumn 2008, the Bank’s key rate was the rate on its collateralised loans to financial institutions. In the wake of the crisis, however, demand for Central Bank loans has been limited, and credit institutions have increased their deposits with the Bank. As a result, the interest rate on the Bank’s deposits has had greater influence on money market rates since 2009.


Summary of the Central Bank of Iceland’s key interest rate

Period:

Key interest rate:

Until April 2009

Collateralised lending rate

April to September 2009

Current account rate

October 2009 to 21 May 2014

Simple average of the current account rate and  maximum rate on 28-day certificates of deposit

From 21 May 2014

Seven-day term deposit rate

 
Explanatory notes on various concepts can be found here.