In a joint Declaration on March 27, 2001 the Government and the Central Bank of Iceland announced a change in the monetary policy framework. An inflation target was adopted and the fluctuation limits on the exchange rate of the króna were abolished (see Press Release Nr. 3/2001). The new policy involved an inflation target of 2½% and tolerance limits of 1½% in either direction from the target in 2003 and therafter. The upper tolerance limit would be higher at the outset, 6% in 2001 and 4½% in 2002. The declaration also stated that if inflation went outside the tolerance limits, the Central Bank would be obliged to submit a report to the Government explaining the reasons for the deviations from the target, how the Bank intended to react and how long it would take to reach the inflation target again in the Bank's assessment. The report of the Bank should be made public.
In June 2001, the 12 month rise in the Consumer Price Index exceeded the upper tolerance limit. In line with the stipulations of the Declaration referred to above, the Central Bank submitted a report to the Government on June 20. The report was made public in Iceland on June 22.
Following is an English translation of the report.