The Central Bank of Iceland conducts monetary policy. Monetary policy decisions are taken by a committee, consisting of five members. MPC. The monetary policy framework is an inflation targeting one. In its Monetary Bulletin which is issued three times a year, the Bank publishes an inflation forecast with a three year horizon. The Bank has six pre-announced interest rate decision dates per year The publication dates of the Monetary Bulletin may coincide with the formal interest rate decision dates. The Board reserves the right to add interest rate decision dates if necessary.
The inflation target was set in March 2001. It is defined as a 12-month rise in the Consumer Price Index (CPI) of 2.5%. The aim is to keep the rate of inflation on average as close to this target as possible, with a tolerance limit for deviation in either direction of 1.5 percentage points. With the adoption of the inflation target the earlier fixed exchange rate regime was abolished and the exchange rate floated.
The Central Bank's main instrument for attaining its inflation target is the interest rate on loans to the financial undertakings against collateral. Every Wednesday there is a non-volume based fixed-price auction of one week loans against collateral at the set policy rate. The Central Bank implements its monetary policy by affecting interest rates in the money market, through the yield in these transactions.