Real exchange rate

More detailed data for ithe real exchange rate can be found in the Databank

Data on the real exchange rate are collected in order to monitor developments in the real exchange rate of the Icelandic króna. The Central Bank also utilizes the data in its operations.

The foundation in law for data collection is in Article 32 of the Act of the Central Bank of Iceland, No. 92/2019 (in Icelandic). In accordance with Article 41 of the Act, the Central bank is allowed to exchange information with public entities concerning matters falling under the scope of this Act, if the exchange of information is consistent with the legally mandated role of the Central Bank or the recipient.

The data are based on the official exchange rate listing, consumer price indices, and indices of unit labour costs for Iceland and its main trading partners, in accordance with their weight in Iceland’s external trade (narrow trade basket). The base year for calculation of the real exchange rate index is 2015 (2015 average = 100).

The real exchange rate is defined as relative developments in prices or unit labour costs in the home country, on the one hand, and in Iceland’s trading partner countries, on the other, from a specified base year and measured in the same currency, and presented as an index.

The Central Bank of Iceland calculates three different real exchange rate indices:

1.    The real exchange rate in terms of relative consumer prices

2.     The real exchange rate in terms of relative harmonised consumer prices*

3.     The real exchange rate in terms of relative unit labour costs

Relative consumer prices are defined as the ratio of consumer prices in Iceland to consumer prices abroad, measured in the same currency. This is calculated in terms of the Icelandic consumer price index, on the one hand, and the harmonised index of consumer prices which excludes the cost of owner-occupied housing, on the other.

Relative unit labour costs are defined as unit labour costs in Iceland as a share of unit labour costs abroad, calculated in the same currency.

The real exchange rate in terms of relative consumer prices and relative unit labour costs is calculated on a quarterly and annual basis. The real exchange rate in terms of relative consumer prices is also calculated on a monthly basis. The indices are recalculated when new data on prices or labour costs are received; therefore, the most recent indices are always preliminary figures based on provisional calculations.

*It should be noted that not all countries included in Iceland’s narrow trade basket calculate and publish harmonised indices of consumer prices for their home countries. Countries that do so account for about 90% in the trade basket, however. The US stopped calculating the harmonised index of consumer prices at the end of 2024. From that point onward, the harmonised index of consumer prices is assumed to move in line with the US consumer price index.

The latest figures are always preliminary.

The real exchange rate is recalculated when new data on developments in the price level and unit labor costs in Iceland's main trading partners become available. Calculations of the real exchange rate are updated monthly to take into account changes as soon as they are received.

The official publication of the exchange rate and consumer price indices are the final publication, but the indices of labor costs per unit of output usually change historically in accordance with audits of the national accounts of Iceland and its trading partners. Sometimes it is necessary to estimate data from trading countries where they have not been received in time. Once the Central Bank's macroeconomic forecast is available, it is possible to publish a new quarterly value for the real exchange rate based on relative wage costs. This value is then updated in the next publication of the real exchange rate after the national accounts have been published on Statistics Iceland's website.