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 development of the króna therefore affects how well the Central Bank succeeds in meeting its statutory objectives. Foreign exchange trading is therefore considered a policy instrument of the Central Bank.
The Central Bank of Iceland is a participant in the interbank foreign exchange market. However, the Central Bank is not a market maker, but rather plays a supervisory role, sets rules for the market and can conduct transactions there if it deems it necessary to promote its objectives. The Central Bank is not obliged to conduct foreign exchange transactions with market makers even if requested to do so, but market makers are obliged to conduct foreign exchange transactions with the Central Bank if it deems it necessary.
When the Central Bank of Iceland buys or sells foreign currency for krónur in the interbank foreign exchange market in order to influence the exchange rate of the krónur, these transactions are called an intervention in the foreign exchange market. Their goal is to reduce excessive volatility in the exchange rate against the króna, whether upward or downward, in both the short and medium term, as the Bank deems appropriate. The ultimate purpose of foreign exchange interventions is to help the Central Bank achieve its objectives of price and financial stability.