New Act on the Central Bank of Iceland
In May 2001, a new Act on the Central Bank of Iceland came into effect. The main elements of the new Act are as follows:
The main objective of monetary policy is to maintain price stability. With the consent of the Minister, the Bank is authorized to adopt an inflation target as a framework for the conduct of monetary policy. An inflation target had been adopted on March 27, 2001 through a joint declaration of the Government and the Central Bank. See Press Release of the Central Bank Nr. 3/2001 The Bank shall also promote other objectives, such as a stable financial system, including payments systems, and other tasks consistent with its role as a central bank. The Bank shall support the economic policy of the Government as long as it does not deem it inconsistent with the objective of price stability. The Act thus gives instrument independence to the Central Bank. The de facto ban on credit to the public sector that has been in force since the early 1990's comes into law with the new Act. Exchange rate policy is decided by the Minister after consultation with the Central Bank, but it has to be consistent with the main monetary policy objective of price stability. A lender of last resort function is provided for.
Monetary policy decision making authority is vested in a Board of Governors consisting of three Governors. They shall be appointed by the Minister to seven year terms with a possible reappointment for a second seven year term. The Minister specifically appoints the Chairman of the Board, also for a seven year term with the possibility of one reappointment.
In order to ensure the highest degree of professionalism in the shaping and implementation of monetary policy, the Act instructs the Governors to set internal working rules on the preparation of, rational for and public presentation of monetary policy decisions. The rules shall inter alia cover the internal procedures which shall be followed, what information and indicators shall be primarily relied on and who among the staff shall participate in the process, although, in the end, the decision making authority rests with the three Governors. Minutes of meetings do not have to be published and the Bank will not be required to disclose the position of individual Governors. The Bank must, on the other hand, publicly explain in detail its monetary policy decisions and the rational behind them. The Bank will be obliged to issue an annual report detailing its activities and quarterly reports on monetary developments and policy and monetary measures. The process described above will enhance the transparency of monetary policy.
The role of the Supervisory Board is spelled out more clearly than before and its size was expanded to seven members. It supervises the activities of the Bank and must approve various rules which will be issued by the Governors, including the rules on the internal working procedures described in the paragraph above. The Supervisory Board also has to approve the operating budget for the Bank at the beginning of each year.
The Bank was relieved of expenditure obligations which more appropriately belong in the fiscal budget.
The Act provides for a build up of the Bank's capital and reserves. When they are below a certain level defined in the bill, the Bank shall pay a third of its annual profit to the Treasury. Once they have reached the stipulated level, two thirds of the profit shall be paid to the Treasury.
In sum, the Bank was granted instrument independence, its financial independence will become more secure and the legal demands on transparency and accountability are strengthened.
As announced in a Press Release issued by the Bank on May 25, the Prime Minister has appointed Governor Birgir Ísleifur Gunnarsson Chairman of the Board of Governors for the remainder of his term in office. Governors Eiríkur Guðnason and Finnur Ingólfsson continue to serve on the Board of Governors. The new Supervisory Board of the Central Bank of Iceland elected Mr. Ólafur G. Einarsson as Chairman and Mr. Davíð Aðalsteinsson as Vice Chairman.
The new Act will be further explained in the August issue of the Bank's Monetary Bulletin.
June 15, 2001