Educational material

The government influences the course of economic issues in two main ways: On the one hand, it does it through fiscal policy and parliamentary legislation and, on the other hand, the government has outsourced the task of handling certain aspects of monetary and financial issues to the Central Bank.

Economics cover, among other things, how we utilise our labour force and various resources to produce goods and services.

Fiscal policy largely deals with how the government obtains revenue from taxes levied on people's wages, various products, and more.

Inflation wrought so much havoc in the latter half of the last century that it was described as a spectre.

Inflation can be defined as a sustained rise in prices over a certain period of time.

High and volatile inflation has adverse consequences for the economy. It can reduce investment and job opportunities and increase inequality in society.

An interest rate is the price of money, i.e. the cost that must be paid for a loan or revenue that is earned from saving money, e.g. in a bank account.

The Central Bank’s key interest rate (sometimes called the policy rate) is the interest rate in transactions with credit institutions that most determines the development of short-term interest rates in the market and thus the level of restraint in monetary policy. The bank's current key interest rate is the interest rate on seven-day term deposits of credit institutions at the Central Bank.

Higher Central Bank interest rates generally lead to increased saving, less borrowing, less consumption and investment, and thus to less demand for goods and services, which should lead to lower inflation than otherwise.

Money is what everyone accepts as payment for goods or services, such as when people buy clothes or food.

Gold has long been part of the Central Bank’s international reserves. The international reserves are a kind of safety fund for the country in foreign currency.

The Central Bank needs to meet the demand for banknotes and coins in society. Individuals and companies withdraw cash from commercial banks or savings banks, e.g. at their ATMs, but banks and savings banks then withdraw the cash from the Central Bank.

Payment intermediation is the mediation of payment for the purchase or sale of goods or services, or a similar financial transfer.

With payment cards and transfers, e.g. in online banking, it is possible to send payments for transactions so that they are transferred almost instantly or after a certain time has passed between the accounts of those involved in the transaction.

The Central Bank does not sell foreign currency to individuals and businesses - and sometimes you have to take old foreign banknotes to the issuing country to have them exchanged.

The goal of the Central Bank of Iceland is to promote price stability, financial stability, and sound and secure financial operations. Since Iceland is a small and open economy with an independent currency, the exchange rate of the króna has a major impact on domestic price developments, the financial system and economic activity in the country as a whole.

The exchange rate of the króna against foreign currencies is recorded at 14:15 Central European Time on each day that regulated foreign exchange markets are generally open.

A foreign exchange market is an international platform where currencies are bought and sold. The role of foreign exchange markets is to facilitate and manage the exchange of foreign currency between those who want to buy and to sell currency. The exchange rate of individual currencies is determined by trading in the foreign exchange market.

Financial stability means that a financial system can withstand shocks in the economy and financial markets, guarantee capital, mediate credit and payments, and spread risk appropriately.

The purpose of setting rules on how large a loan can be taken out, such as for housing purchases, is, among other things, to counter excessive consumer indebtedness and strengthen the resilience of both borrowers and lenders, i.e. the banks, against a potential turnaround in real estate prices.

A resolution authority is a government authority that is responsible for preparing and implementing the resolution process of credit institutions and securities firms.

The objective of financial supervision is to promote an efficient and secure financial market with the aim of reducing the risk of activities of regulated entities causing damage to the public and to promote confidence in the financial market.

In simple terms, money laundering is said to occur when money obtained from illicit activities is made to appear as legitimate money. The purpose of money laundering is to conceal the trail of ill-gotten funds so that criminals can use them for personal consumption or investment.

A regulated entity is a company or institution that has been issued with an operating licence by the Central Bank of Iceland and, where applicable, other public authorities to conduct activities in the financial market or which the Financial Supervisory Authority has been instructed to supervise by law.

Central banks are independent so that they can better focus on their goals without interference from others and for a longer period of time than is often the case with, for example, the length of politicians' terms in office. This is believed to contribute to greater stability in the economy, among other things.

The Central Bank's international reserves are the bank's external assets in foreign currencies, i.e. deposits in foreign banks, bond holdings, assets with the International Monetary Fund, gold and other foreign assets.

Risks related to environmental issues, such as climate change, are directly related to the Bank's main objectives of price stability, financial stability, and a sound and secure financial system. There is evidence that rising global temperatures may affect food production and prices.