- New rules on Central Bank of Iceland facilities for financial undertakings and changed presentation of the policy rate

New rules on Central Bank of Iceland facilities for financial undertakings and
on current accounts in the Central Bank of Iceland have been published in
Icelandic on the Bank's website today, together with an announcement on Central
Bank of Iceland interest rates. The rules will be published in English
translation after they enter into force on June 21. Several of the changes
entailed by the new rules were announced in Central Bank of Iceland press
release no. 8 on May 16 this year. Furthermore, the Central Bank's regular
facilities for financial undertakings, which have been provided on Tuesdays,
will in future be provided on Wednesdays, as of Wednesday June 27. 


As announced on May 16, it should be underlined that the Central Bank of
Iceland's policy rate is now presented as a 13.30% nominal interest rate
instead of 14.25%, which is the corresponding annual rate of return. No change
in policy rate is implied by this new numerical presentation. As stated in the
press release of May 16, the policy rate that the Central Bank has published in
its interest rate announcements until now has strictly speaking been the annual
rate of return and not the nominal interest rate. It has now been decided that
all Central Bank interest rates will in future be stated and announced as
nominal rates. When interest rates are calculated more than once a year, this
means that the nominal interest rate will be lower than the yield. Since
December 2006, the yield on Central Bank loan facilities for financial
companies has been 14.25% p.a. The Central Bank's policy rate has generally
been referred to as 14.25%. Most central banks adopt a different approach and
state their policy rates in nominal terms. One consequence has that comparisons
between the policy rate of the Central Bank of Iceland and other central banks
has been misleading. For example, the nominal rate corresponding to an annual
return of 14.25% on Central Bank loans against collateral is 13.30%. Thus in
comparing the Central Bank of Iceland's policy rate with that of other central
banks, the logical figure to use would currently be 13.30% and not 14.25%. 


In other words, the change announced now does not involve a change in the
policy rate or monetary stance, only in their numerical presentation. 


For further information contact Eiríkur Guðnason, Governor of the Central Bank
of Iceland, or Sturla Pálsson, Director of International and Market Operations,
tel. +354-5699600.