What is the economic role of the Central Bank?

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. The Central Bank has numerous tasks to perform, but the Act on the Central Bank of Iceland discusses its three main functions. These are to promote price stability, ensure financial stability, and promote sound and secure financial activities.

With price stability the aim is for annual inflation to be as close as possible to 2½%, which is the inflation target agreed upon by the Central Bank and the Government of Iceland. The Central Bank primarily uses interest rates in transactions with credit institutions to influence inflation.

Financial stability means promoting a stable, safe and efficient financial system. The financial system needs to be able to withstand various shocks and fluctuations. It must be ensured that credit institutions can accept savings from people and companies and invest them, and furthermore that credit institutions can mediate credit to individuals and companies. Moreover, it is necessary to ensure that payment intermediation in Iceland and abroad is effective and secure. A healthy financial system is a necessary prerequisite for stability and economic growth and an active monetary policy that promotes price stability. To monitor the health of the financial system, the Central Bank uses, among other things, stress tests and scenario analyses of key risk factors. To promote financial stability, the Central Bank sets various rules for the activities of financial institutions to prevent risks from arising in their operations, such as those that occurred in 2008, among other things.

The Central Bank should promote reliable and safe financial operations. Therefore, the Bank monitors the activities of various entities in the financial system, known as regulated entities, to ensure that they comply with laws and government regulations and are otherwise in accordance with sound and healthy business practices. The Central Bank therefore monitors, among other things, business practices towards consumers and other customers of financial services and provides various information and guidance services.

The Central Bank carries out various other related tasks that are consistent with its role as a central bank. These include maintaining foreign exchange reserves. The Central Bank shall also promote the advancement of the Government's economic policy, provided it does not consider it to be contrary to the Bank's objectives.