CINXE.COM

<!DOCTYPE html> <html lang="en"> <head> <meta charset="utf-8" /> <meta name="viewport" content="width=device-width, initial-scale=1.0" /> <meta property="og:title" content="Monetary policy transmission" /> <meta property="og:image" content="http://sedlabanki.is/lisalib/getfile.aspx?itemid=c1887266-1c09-11e5-93fc-005056bc0bdb" /> <meta name="twitter:card" content="summary" /> <meta name="twitter:image" content="https://sedlabanki.is/lisalib/getfile.aspx?itemid=21832d3f-8324-11ea-911f-005056bc3d8f" /> <meta property="pageid" content="01914a2e-0460-11e5-93fa-005056bc0bdb" /> <title>Monetary policy transmission</title> <style type="text/css"> @import url(//fonts.googleapis.com/css?family=Open+Sans:300,400,600,700); </style> <link rel="stylesheet" type="text/css" href="/supportfiles/css/print.less?v=19000101000000" /> <link rel="stylesheet" type="text/css" href="/supportfiles/css/english.less?v=20201123101826" /> <meta name="description" content="Monetary policy affects individuals’ and firms’ saving and spending decisions by determining interest rates for the Bank’s transactions with other financial institutions." /> <link rel="stylesheet" type="text/css" href="/LisaLib/Css/Content.css"/> <script src="/LisaLib/GetSupportFile.aspx?id=fd35a1df-f7e0-11e4-93fd-005056bc2afe" type="text/javascript" ></script>  <script src="/LisaLib/GetSupportFile.aspx?id=c37fce20-1b43-11e5-93ff-005056bc2afe" type="text/javascript" ></script>  <script src="/LisaLib/GetSupportFile.aspx?id=fd35a1d9-f7e0-11e4-93fd-005056bc2afe" type="text/javascript" ></script>  <link rel="stylesheet" href="/LisaLib/GetSupportFile.aspx?id=fd35a20c-f7e0-11e4-93fd-005056bc2afe" type="text/css" />  <link rel="stylesheet" href="/LisaLib/GetSupportFile.aspx?id=30204444-fc03-11ea-9b8d-005056bccf91" tyoe="text/css" />  <link rel="stylesheet" href="//code.jquery.com/ui/1.10.1/themes/base/jquery-ui.css" />  <script src="//ajax.aspnetcdn.com/ajax/jquery.validate/1.11.1/jquery.validate.js"></script> <script src="//ajax.aspnetcdn.com/ajax/jquery.migrate/jquery-migrate-1.2.1.js"></script> <script src="//ajax.aspnetcdn.com/ajax/mvc/3.0/jquery.unobtrusive-ajax.js"></script> <script src="//ajax.aspnetcdn.com/ajax/mvc/3.0/jquery.validate.unobtrusive.js"></script> <script src="//code.jquery.com/ui/1.10.1/jquery-ui.js"></script>  <script>(function(w,d,s,l,i){w[l]=w[l]||[];w[l].push({'gtm.start': new Date().getTime(),event:'gtm.js'});var f=d.getElementsByTagName(s)[0], j=d.createElement(s),dl=l!='dataLayer'?'&l='+l:'';j.async=true;j.src= 'https://www.googletagmanager.com/gtm.js?id='+i+dl;f.parentNode.insertBefore(j,f); })(window,document,'script','dataLayer','GTM-K26LJQZ');</script>   <script src="https://cdn.cookiehub.eu/c2/aa057b27.js"></script> <script type="text/javascript"> window.dataLayer = window.dataLayer || []; function gtag(){dataLayer.push(arguments);} gtag('consent', 'default', {'ad_storage': 'denied', 'analytics_storage': 'denied', 'wait_for_update': 500}); document.addEventListener("DOMContentLoaded", function(event) { var cpm = {}; window.cookiehub.load(cpm); }); </script>  </head> <body class="en">  <div id="fb-root"></div> <script>(function(d, s, id) { var js, fjs = d.getElementsByTagName(s)[0]; if (d.getElementById(id)) return; js = d.createElement(s); js.id = id; js.src = "//connect.facebook.net/is_IS/all.js#xfbml=1"; fjs.parentNode.insertBefore(js, fjs); }(document, 'script', 'facebook-jssdk'));</script> <div class="wrapper english"> <header class="navbar" role="banner" > <div class="container"> <div class="navbar-header"> <a class="navbar-brand mobile" href="/"><img src="/library/Templates/2019/logo_white.svg" alt="Logo Mobile" /></a> <a class="navbar-brand" href="/"><img src="/library/Templates/2019/logo.svg" alt="Go to frontpage - Central Bank of Iceland" /></a> <h1 class="visuallyhidden">Seðlabanki</h1> <div class="header-shortnav pull-right"> <ul class=""> <li><a href="/default.aspx?pageid=1bf92874-0542-11e5-93fa-005056bc0bdb">About the Bank</a></li> <li><a href="http://www.sedlabanki.is/peningastefna/verdbolgumarkmid/midlun-peningastefnunnar/" class="icelandicLink">Icelandic</a></li> <li role="search" > <form action="/search/" method="get" class="searchHead"> <label for="searchBox" class="control-label sr-only">Search</label> <input type="text" name="searchstring" id="searchBox" placeholder="Search string" title="Search string"> <button type="submit" class="blueButton"><span class="sr-only">Search</span></button> </form> </li> </ul> </div> <nav class="navbar-right" id="sticky" role="navigation"><h2 class="sr-only" id="navDesktopLabel">Valmynd fyrir stærri skjái</h2><ul class="nav navbar-nav navbar-right"><li class="level1 childselected active first dropdown"><a href="/monetary-policy/" class="level1 childselected dropdown-toggle" data-toggle="dropdown">Monetary Policy<b class="caret"></b></a><ul class="dropdown-menu"><li class="level2 first"><a href="/monetary-policy/monetary-policy-committee/" class="level2">Monetary Policy Committee</a></li><li class="level2 childselected active dropdown"><a href="/monetary-policy/inflation-target/" class="level2 childselected dropdown-toggle" data-toggle="dropdown">Inflation target<b class="caret"></b></a><ul class="dropdown-menu"><li class="level3 first"><a href="/monetary-policy/inflation-target/inflation/" class="level3">Inflation</a></li><li class="level3"><a href="/monetary-policy/inflation-target/price-stability/" class="level3">Price stability</a></li><li class="level3 selected active last"><a href="/monetary-policy/inflation-target/monetary-policy-transmission/" class="level3 selected">Monetary policy transmission</a></li></ul></li><li class="level2"><a href="/monetary-policy/central-bank-of-iceland-economic-forecasts/" class="level2">Central Bank of Iceland economic forecasts</a></li><li class="level2 last"><a href="/monetary-policy/markets-and-market-operations/" class="level2">Markets and market operations</a></li></ul></li><li class="level1"><a href="/financial-stability/" class="level1">Financial Stability</a></li><li class="level1"><a href="/financial-supervision/" class="level1">Financial Supervision</a></li><li class="level1"><a href="/statistics/" class="level1">Statistics</a></li><li class="level1"><a href="/publications/" class="level1">Publications</a></li><li class="level1
 hidden
 last"><a href="/about-the-bank/central-bank-of-iceland/?" class="level1">About the Bank</a></li></ul></nav> </div> </div> <nav class="main" id="mobile"> <div class="bar"> <div class="wrapper"><div class="openNav"><div class="button"><a id="nav-toggle" href="#"><span></span><span class="sr-only">Opna valmynd</span></a></div></div><ul class="nav-collapse"><li data-pageid="4b641e8b-0391-11e5-93fd-005056bc2afe" class="leveling1 childselected first"><div class="show-children"></div><a href="/monetary-policy/" class="leveling1 childselected">Monetary Policy</a><ul class="leveling1"><li class="leveling2" data-pageid="1a036506-0460-11e5-93fa-005056bc0bdb"><div class="show-children"></div><a href="/monetary-policy/monetary-policy-committee/" class="leveling2 first">Monetary Policy Committee</a><ul class="leveling2"><li class="leveling3" data-pageid="2d831eb1-0460-11e5-93fa-005056bc0bdb"><a href="/monetary-policy/monetary-policy-committee/meetings-with-parliamentary-committees-and-related-reports/" class="leveling3 first">Meetings with Parliamentary committees and related reports</a></li><li class="leveling3" data-pageid="5596b447-0460-11e5-93fa-005056bc0bdb"><a href="/monetary-policy/monetary-policy-committee/reports-to-the-government-on-inflation/" class="leveling3 last">Reports to the Government on inflation</a></li></ul></li><li class="leveling2" data-pageid="fdebb4c6-0398-11e5-93fd-005056bc2afe"><div class="show-children"></div><a href="/monetary-policy/inflation-target/" class="leveling2 childselected">Inflation target</a><ul class="leveling2"><li class="leveling3" data-pageid="457d047b-0f87-11e5-93fd-005056bc2afe"><a href="/monetary-policy/inflation-target/inflation/" class="leveling3 first">Inflation</a></li><li class="leveling3" data-pageid="ea11ff12-045f-11e5-93fa-005056bc0bdb"><a href="/monetary-policy/inflation-target/price-stability/" class="leveling3">Price stability</a></li><li class="leveling3" data-pageid="01914a2e-0460-11e5-93fa-005056bc0bdb"><a href="/monetary-policy/inflation-target/monetary-policy-transmission/" class="leveling3 selected last">Monetary policy transmission</a></li></ul></li><li class="leveling2" data-pageid="7fd288b8-0460-11e5-93fa-005056bc0bdb"><a href="/monetary-policy/central-bank-of-iceland-economic-forecasts/" class="leveling2">Central Bank of Iceland economic forecasts</a></li><li class="leveling2" data-pageid="9423bd1d-0460-11e5-93fa-005056bc0bdb"><div class="show-children"></div><a href="/monetary-policy/markets-and-market-operations/" class="leveling2 last">Markets and market operations</a><ul class="leveling2"><li class="leveling3" data-pageid="42774064-0eb7-11e5-93fa-005056bc0bdb"><a href="/monetary-policy/markets-and-market-operations/central-bank-of-iceland-measures/" class="leveling3 first">Central Bank of Iceland measures</a></li><li class="leveling3" data-pageid="1025f736-9b2f-11ee-9bb6-cea90ae48c85"><a href="/monetary-policy/markets-and-market-operations/cbi-market-activity-and-policy-instruments/" class="leveling3">CBI market activity and policy instruments</a></li><li class="leveling3" data-pageid="8ad35284-9b2f-11ee-9bb6-cea90ae48c85"><a href="/monetary-policy/markets-and-market-operations/markets/" class="leveling3">Markets</a></li><li class="leveling3" data-pageid="af631df5-9b2f-11ee-9bb6-cea90ae48c85"><a href="/monetary-policy/markets-and-market-operations/securities-eligible-as-collateral/" class="leveling3">Securities eligible as collateral</a></li><li class="leveling3" data-pageid="c4f07452-9b2f-11ee-9bb6-cea90ae48c85"><a href="/monetary-policy/markets-and-market-operations/payment-system/" class="leveling3 last">Payment system</a></li></ul></li></ul><div class="clearfix"></div></li><li data-pageid="2ab3b479-03a3-11e5-93fd-005056bc2afe" class="leveling1"><div class="show-children"></div><a href="/financial-stability/" class="leveling1">Financial Stability</a><ul class="leveling1"><li class="leveling2" data-pageid="0129307a-c637-4c71-ae6a-7506c189a9df"><div class="show-children"></div><a href="/financial-stability/financial-stability-committee/" class="leveling2 first">Financial Stability Committee</a><ul class="leveling2"><li class="leveling3" data-pageid="bc0941a6-83d4-4278-bdb4-1c7a04ea1613"><a href="/financial-stability/financial-stability-committee/fsn-meetings-with-parliamentary-committees-and-related-reports/" class="leveling3 first last single">FSN meetings with Parliamentary committees and related reports</a></li></ul></li><li class="leveling2" data-pageid="afe51f42-0463-11e5-93fd-005056bc2afe"><div class="show-children"></div><a href="/financial-stability/macroprudential-policy/" class="leveling2">Macroprudential policy</a><ul class="leveling2"><li class="leveling3" data-pageid="6805b216-abb4-4dba-a640-a02f590761b2"><a href="/financial-stability/macroprudential-policy/capital-buffers/" class="leveling3 first">Capital buffers</a></li><li class="leveling3" data-pageid="9f95c758-0463-11e5-93fd-005056bc2afe"><a href="/financial-stability/macroprudential-policy/foreign-exchange-balance/" class="leveling3">Foreign exchange balance</a></li><li class="leveling3" data-pageid="a8405745-0463-11e5-93fd-005056bc2afe"><a href="/financial-stability/macroprudential-policy/liquidity-and-stable-funding/" class="leveling3">Liquidity and stable funding</a></li><li class="leveling3" data-pageid="4913f57c-7cee-44d2-8de0-dc0170c85d92"><a href="/financial-stability/macroprudential-policy/restrictions-on-mortgage-lending/" class="leveling3">Restrictions on mortgage lending</a></li><li class="leveling3" data-pageid="63165d66-5afc-463e-9621-cb54ea0050ac"><a href="/financial-stability/macroprudential-policy/cbi-stress-test/" class="leveling3 last">CBI Stress test</a></li></ul></li><li class="leveling2" data-pageid="b7120589-1c2c-11ea-911b-005056bc3d8f"><div class="show-children"></div><a href="/financial-stability/oversight-of-financial-market-infrastructures/" class="leveling2">Oversight of financial market infrastructures</a><ul class="leveling2"><li class="leveling3" data-pageid="664cfdb3-1731-11ee-9bb0-005056bccf91"><a href="/financial-stability/oversight-of-financial-market-infrastructures/cyber-resilience-testing/" class="leveling3 first">Cyber resilience testing</a></li><li class="leveling3" data-pageid="0fd65b1d-09cf-11e5-93fa-005056bc0bdb"><div class="show-children"></div><a href="/financial-stability/oversight-of-financial-market-infrastructures/banknotes-and-coin/" class="leveling3 last">Banknotes and coin</a><ul class="leveling3"><li class="leveling4"><a href="/financial-stability/oversight-of-financial-market-infrastructures/banknotes-and-coin/valid-banknotes-in-circulation/" class="leveling4">Valid banknotes in circulation</a></li><li class="leveling4"><a href="/financial-stability/oversight-of-financial-market-infrastructures/banknotes-and-coin/valid-coins-in-circulation/" class="leveling4">Valid coins in circulation</a></li><li class="leveling4"><a href="/financial-stability/oversight-of-financial-market-infrastructures/banknotes-and-coin/notes-and-coin-in-circulation/" class="leveling4">Notes and coin in circulation</a></li><li class="leveling4"><a href="/financial-stability/oversight-of-financial-market-infrastructures/banknotes-and-coin/withdrawal-of-banknotes/" class="leveling4">Withdrawal of banknotes</a></li><li class="leveling4"><a href="/financial-stability/oversight-of-financial-market-infrastructures/banknotes-and-coin/reproduction-and-forgery/" class="leveling4">Reproduction and forgery</a></li></ul></li></ul></li><li class="leveling2" data-pageid="683d9600-f1c7-443f-8d95-2b240202c368"><div class="show-children"></div><a href="/financial-stability/foreign-exchange/" class="leveling2">Foreign exchange</a><ul class="leveling2"><li class="leveling3" data-pageid="1d2c75f3-5b3e-11e7-90f6-005056bc3d8f"><a href="/financial-stability/foreign-exchange/capital-controls/" class="leveling3 first last single">Capital controls</a></li></ul></li><li class="leveling2" data-pageid="1279a8b5-7cfc-11ec-9b9f-005056bccf91"><div class="show-children"></div><a href="/financial-stability/resolution-authority/" class="leveling2 last">Resolution Authority</a><ul class="leveling2"><li class="leveling3" data-pageid="2121bb0f-7cfe-11ec-9b9f-005056bccf91"><a href="/financial-stability/resolution-authority/resolution/" class="leveling3 first">Resolution</a></li><li class="leveling3" data-pageid="9758c87a-7cfe-11ec-9b9f-005056bccf91"><a href="/financial-stability/resolution-authority/resolution-plans/" class="leveling3">Resolution plans</a></li><li class="leveling3" data-pageid="08858fd0-7cff-11ec-9b9f-005056bccf91"><a href="/financial-stability/resolution-authority/mrel/" class="leveling3">MREL</a></li><li class="leveling3" data-pageid="241fc8e1-7d00-11ec-9b9f-005056bccf91"><a href="/financial-stability/resolution-authority/resolution-fund-/" class="leveling3 last">Resolution Fund </a></li></ul></li></ul><div class="clearfix"></div></li><li data-pageid="a82e28dc-2e0a-11ea-911c-005056bc3d8f" class="leveling1"><div class="show-children"></div><a href="/financial-supervision/" class="leveling1">Financial Supervision</a><ul class="leveling1"><li class="leveling2" data-pageid="f712521f-dce4-4c47-a93b-3bf4363e79a6"><a href="https://en.fme.is/about-us/financial-supervision-committee/" class="leveling2 first">Financial Supervision Committee</a></li><li class="leveling2" data-pageid="8259f1de-fbfa-4bbc-bc76-7c5c0230f57b"><a href="https://en.fme.is/supervision/" class="leveling2">Supervision</a></li><li class="leveling2" data-pageid="df0c40a8-4ce9-4ab8-b95f-15e7306eb7d3"><a href="https://en.fme.is/supervision/consumer-affairs/" class="leveling2 last">Consumer Affairs</a></li></ul><div class="clearfix"></div></li><li data-pageid="61a0fb5e-03a3-11e5-93fd-005056bc2afe" class="leveling1"><div class="show-children"></div><a href="/statistics/" class="leveling1">Statistics</a><ul class="leveling1"><li class="leveling2" data-pageid="eeb290ab-09ce-11e5-93fa-005056bc0bdb"><a href="/statistics/data/" class="leveling2 first">Data</a></li><li class="leveling2" data-pageid="17aa1bad-d69b-11e7-90f9-005056bc3d8f"><a href="https://www.cb.is/other/key-interest-rate/" class="leveling2">Interest rates</a></li><li class="leveling2" data-pageid="e602fd30-c37d-11e6-9406-005056bc0bdb"><a href="/statistics/release-calendar/" class="leveling2">Release calendar</a></li><li class="leveling2" data-pageid="f65c04bb-09ce-11e5-93fa-005056bc0bdb"><a href="/statistics/sdds/" class="leveling2">SDDS</a></li><li class="leveling2" data-pageid="f65c04c3-09ce-11e5-93fa-005056bc0bdb"><a href="/statistics/methodology/" class="leveling2">Methodology</a></li><li class="leveling2" data-pageid="7f26cc45-e5cd-11ed-9bae-005056bccf91"><div class="show-children"></div><a href="/statistics/surveys/" class="leveling2">Surveys</a><ul class="leveling2"><li class="leveling3" data-pageid="9bf04a6c-4211-4344-ac7b-4dcd1a0aeb25"><a href="/statistics/surveys/survey-of-market-expectations/" class="leveling3 first">Survey of market expectations</a></li><li class="leveling3" data-pageid="b954cf80-0f2e-400e-9ee6-cd8e810e00b5"><a href="/statistics/surveys/lending-survey/" class="leveling3 last">Lending survey</a></li></ul></li><li class="leveling2" data-pageid="684d781c-e066-11e9-911a-005056bc3d8f"><a href="/statistics/various-measures-of-inflation-expectations/" class="leveling2">Various measures of inflation expectations</a></li><li class="leveling2" data-pageid="fcac51d5-09ce-11e5-93fa-005056bc0bdb"><div class="show-children"></div><a href="/statistics/official-exchange-rate/" class="leveling2">Official exchange rate</a><ul class="leveling2"><li class="leveling3" data-pageid="7b0f42b5-04e5-11e8-8caf-d481d7105f70"><a href="/statistics/official-exchange-rate/trade-weighted-indices/" class="leveling3 first">Trade-weighted indices</a></li><li class="leveling3" data-pageid="6909b7bd-5189-45dd-bf5b-c76ea33496ef"><a href="/?PageId=6909b7bd-5189-45dd-bf5b-c76ea33496ef" class="leveling3">Time series</a></li><li class="leveling3" data-pageid="9468ed2b-09f1-11e5-93fa-005056bc0bdb"><a href="/statistics/official-exchange-rate/revised-currency-baskets/" class="leveling3">Revised currency baskets</a></li><li class="leveling3" data-pageid="56a8b44d-a762-11e7-90f9-005056bc3d8f"><a href="/statistics/official-exchange-rate/faq/" class="leveling3 last">FAQ</a></li></ul></li><li class="leveling2" data-pageid="fcac51cd-09ce-11e5-93fa-005056bc0bdb"><a href="/statistics/xml-data/" class="leveling2 last">XML data</a></li></ul><div class="clearfix"></div></li><li data-pageid="766ba718-03a3-11e5-93fd-005056bc2afe" class="leveling1"><div class="show-children"></div><a href="/publications/" class="leveling1">Publications</a><ul class="leveling1"><li class="leveling2" data-pageid="ba6ab676-0b91-11e5-93fd-005056bc2afe"><a href="http://www.cb.is/publications/news/news-all-years" class="leveling2 first">News</a></li><li class="leveling2" data-pageid="6b771c14-2efc-11e5-93fc-005056bc0bdb"><div class="show-children"></div><a href="/publications/publications/publications-all-archive/?" class="leveling2">Publications</a><ul class="leveling2"><li class="leveling3" data-pageid="782b93c9-796f-11ee-9bb6-005056bccf91"><a href="/publications/publications/previously-published-material/" class="leveling3 first last single">Previously published material</a></li></ul></li><li class="leveling2" data-pageid="fec64f70-0460-11e5-93fa-005056bc0bdb"><a href="http://www.cb.is/publications/Speeches/Speeches-all-years/?all=1&" class="leveling2">Speeches</a></li><li class="leveling2" data-pageid="5cce971b-9df6-11e7-90f7-005056bc3d8f"><a href="/publications/events/" class="leveling2">Events</a></li><li class="leveling2" data-pageid="69ea0932-e385-11e9-911a-005056bc3d8f"><a href="/publications/conferences/" class="leveling2 last">Conferences</a></li></ul><div class="clearfix"></div></li><li data-pageid="3fbf364c-0eb4-447a-a7fa-d05b9667c68b" class="leveling1 last"><div class="show-children"></div><a href="/about-the-bank/central-bank-of-iceland/?" class="leveling1">About the Bank</a><ul class="leveling1"><li class="leveling2" data-pageid="f7673198-09d2-11e5-93fd-005056bc2afe"><div class="show-children"></div><a href="/about-the-bank/central-bank-of-iceland/" class="leveling2 first">Central Bank of Iceland</a><ul class="leveling2"><li class="leveling3" data-pageid="16fc3750-09cd-11e5-93fa-005056bc0bdb"><a href="/about-the-bank/central-bank-of-iceland/organisation/" class="leveling3 first">Organisation</a></li><li class="leveling3" data-pageid="3fd2fe5a-09cd-11e5-93fa-005056bc0bdb"><a href="/about-the-bank/central-bank-of-iceland/history-and-premises/" class="leveling3">History and premises</a></li><li class="leveling3" data-pageid="3fd2fe62-09cd-11e5-93fa-005056bc0bdb"><a href="/about-the-bank/central-bank-of-iceland/libraries-and-collection/" class="leveling3">Libraries and collection</a></li><li class="leveling3" data-pageid="4c99ad04-09cd-11e5-93fa-005056bc0bdb"><a href="/about-the-bank/central-bank-of-iceland/laws-and-rules/" class="leveling3">Laws and rules</a></li><li class="leveling3" data-pageid="638c007b-b1dc-11e8-9101-005056bc3d8f"><a href="/about-the-bank/central-bank-of-iceland/personal-data-protection/" class="leveling3">Personal Data Protection</a></li><li class="leveling3" data-pageid="4c99ad0c-09cd-11e5-93fa-005056bc0bdb"><a href="/about-the-bank/central-bank-of-iceland/tariff/" class="leveling3 last">Tariff</a></li></ul></li><li class="leveling2" data-pageid="18f3c86a-09d5-11e5-93fd-005056bc2afe"><a href="/about-the-bank/international-cooperation/" class="leveling2">International cooperation</a></li><li class="leveling2" data-pageid="21b627f2-09d5-11e5-93fd-005056bc2afe"><a href="/about-the-bank/international-reserves/" class="leveling2">International reserves</a></li><li class="leveling2" data-pageid="2a631c33-09d5-11e5-93fd-005056bc2afe"><a href="/about-the-bank/government-debt-management/" class="leveling2">Government debt management</a></li><li class="leveling2" data-pageid="8823f429-a22e-11e9-9113-005056bc3d8f"><div class="show-children"></div><a href="/about-the-bank/careers/" class="leveling2">Careers</a><ul class="leveling2"><li class="leveling3" data-pageid="35d31f82-a0f6-11eb-9b94-005056bccf91"><a href="/about-the-bank/careers/equal-pay-policy/" class="leveling3 first last single">Equal Pay Policy</a></li></ul></li><li class="leveling2" data-pageid="5d3b80fc-20b5-11ea-911b-005056bc3d8f"><a href="/about-the-bank/media/" class="leveling2">Media</a></li><li class="leveling2" data-pageid="72f667dc-09ce-11e5-93fa-005056bc0bdb"><a href="/about-the-bank/explanatory-notes/" class="leveling2 last">Explanatory notes</a></li></ul><div class="clearfix"></div></li><li class="leveling1"><a href="http://www.sedlabanki.is" class="leveling2">Icelandic</a></li><li class="leveling1 leit"><br /><div class="leit"><form action="/Leit" method="get" class="searchHead"><label for="searchBoxRe">Leit</label><input type="text" name="searchstring" id="searchBoxRe" placeholder="Search" /><input type="submit" class="blueButton" value="Leita" /></form></div></li></ul></div> </div> </nav> </header> <div class="breadcrumbs hidden-xs hidden-sm"> <div class="container"><ul id="breadcrumbs" class="pull-right"><li><a href="/" title="Frontpage">Front page</a><img src="/themes/Bootstrap/img/divider.png" /></li><li><a href="/monetary-policy/" onclick="" title="PageName">Monetary Policy</a><img src="/themes/Bootstrap/img/divider.png" /></li><li><a href="/monetary-policy/inflation-target/" onclick="" title="PageName">Inflation target</a><img src="/themes/Bootstrap/img/divider.png" /></li><li class="last"><a href="/monetary-policy/inflation-target/monetary-policy-transmission/" onclick="" title="PageName">Monetary policy transmission</a></li></ul></div> </div> <div class="container main" role="main"><aside class="left col-md-3 hidden-xs hidden-sm" > <ul class="sidbarNav"><li data="/monetary-policy/monetary-policy-committee/" class="sprite sbar level2 first "><div style="display:none">/monetary-policy/monetary-policy-committee/</div><a href="/monetary-policy/monetary-policy-committee/">Monetary Policy Committee</a><span class="arrow"></span></li><li data="/monetary-policy/inflation-target/" class="sprite sbar level2 childselected "><div style="display:none">/monetary-policy/inflation-target/</div><a href="/monetary-policy/inflation-target/">Inflation target</a><span class="arrow"></span></li><ul class="sidbarNav"><li data="/monetary-policy/inflation-target/inflation/" class="sprite sbar level3 first "><div style="display:none">/monetary-policy/inflation-target/inflation/</div><a href="/monetary-policy/inflation-target/inflation/">Inflation</a><span class="arrow"></span></li><li data="/monetary-policy/inflation-target/price-stability/" class="sprite sbar level3 "><div style="display:none">/monetary-policy/inflation-target/price-stability/</div><a href="/monetary-policy/inflation-target/price-stability/">Price stability</a><span class="arrow"></span></li><li data="/monetary-policy/inflation-target/monetary-policy-transmission/" class="sprite sbar level3 selected last "><div style="display:none">/monetary-policy/inflation-target/monetary-policy-transmission/</div><a href="/monetary-policy/inflation-target/monetary-policy-transmission/">Monetary policy transmission</a><span class="arrow"></span></li></ul><li data="/monetary-policy/central-bank-of-iceland-economic-forecasts/" class="sprite sbar level2 "><div style="display:none">/monetary-policy/central-bank-of-iceland-economic-forecasts/</div><a href="/monetary-policy/central-bank-of-iceland-economic-forecasts/">Central Bank of Iceland economic forecasts</a><span class="arrow"></span></li><li data="/monetary-policy/markets-and-market-operations/" class="sprite sbar level2 last "><div style="display:none">/monetary-policy/markets-and-market-operations/</div><a href="/monetary-policy/markets-and-market-operations/">Markets and market operations</a><span class="arrow"></span></li></ul> </aside> <div class="subpage col-md-9"> <div class="visible-print" style="margin-top:-50px;" > <img src="/themes/Bootstrap/img/logo.png" height="42" width="42" /> <br /><br /> </div> <h1>Monetary policy transmission</h1> <div class="l-user-content">The principal policy instrument that the Central Bank uses to attain the inflation target is its interest rates on transactions with other financial institutions, which then affect other interest rates in Iceland. Commercial banks and pension funds generally change their interest rates after changes are made to the Central Bank’s key interest rate. If interest rates are raised, it becomes more costly to borrow funds and more beneficial to save. If interest rates are lowered, the reverse applies. In this way, monetary policy affects the saving and spending decisions made by households, businesses, and the public sector, which in turn affect the price level. If people spend less and save more, there is less incentive to raise prices, and vice versa. If the Central Bank considers it warranted, it can also conduct transactions in the interbank foreign exchange market so as to affect the exchange rate of the króna, thereby affecting the price level. <p style="text-align: left;"> </p></div><h3 class="qa-title"><span class="pull-right open-all" data-target="7d753eaf-0ad5-11e5-93fa-005056bc0bdb">Show all</span></h3><span class="currency_qa"><ul class="qa 7d753eaf-0ad5-11e5-93fa-005056bc0bdb"><li id="7d753eaf-0ad5-11e5-93fa-005056bc0bdbplus1" class="plus"><h2 href="#" id="question1" class="question ">Interest rates</h2><div class="slide-down answer1"><p style="text-align: left;">The Central Bank Monetary Policy Committee’s (MPC) interest rate decisions affect other financial variables in Iceland, including other short- and long-term interest rates, financial system liquidity, money holdings, lending, currency exchange rates, other financial asset prices, and – last but not least – expectations concerning how all of these variables will develop in the future. All of this then affects households’ and businesses’ consumption and investment decisions. The Central Bank’s interest rates therefore affect aggregate demand in the economy, pressure to change prices, and ultimately, inflation.</p> <p style="text-align: left;">The Central Bank’s interest rates in its transactions with financial institutions affect other short-term money market rates first, as the money market is where transactions with short-term securities take place. Through price formation in the financial market, the effects are transmitted across the yield curve. The Bank’s key interest rate (policy rate) is the rate on transactions with credit institutions that is the primary determinant of short-term market rates and therefore of the monetary stance. The interest rate that has the strongest effect on short-term market rates and is therefore considered<a href="http://https://www.cb.is/other/key-interest-rate/" target="_blank"> the Central Bank’s key rate </a>may change from time to time.</p> <p style="text-align: left;">Changes in Central Bank interest rates have a broad impact on the domestic economy. For instance, Central Bank rate increases usually cause interest rates on savings, outstanding short-term debt, and long-term variable-rate debt to rise as well. This reduces the income that households and businesses with outstanding net liabilities have at their disposal after making interest payments. Households’ and businesses’ capacity to maintain an unchanged level of consumption and investment spending is then reduced unless they take on additional debt or tap their savings, both of which are more expensive when interest rates are higher. In the same manner, monetary policy affects households’ and businesses’ cost of financing new activities. All else being equal, higher interest rates therefore reduce households’ and businesses’ consumption and investment spending.</p> <p style="text-align: left;">When interest rates are lowered, the same forces are at work, but in the opposite direction.</p></div></li><li id="7d753eaf-0ad5-11e5-93fa-005056bc0bdbplus2" class="plus"><h2 href="#" id="question2" class="question ">Credit channel</h2><div class="slide-down answer2">An important channel for monetary policy transmission lies through the credit system. The interest rates offered to credit institutions by the Central Bank determine how favourable a rate they can offer to individuals and businesses. All else being equal, higher lending rates dampen demand for credit. They can also reduce the supply of credit, as credit risk can increase – for instance, because households’ net wealth declines (see below) and firms’ market value falls and their cash flow deteriorates.</div></li><li id="7d753eaf-0ad5-11e5-93fa-005056bc0bdbplus3" class="plus"><h2 href="#" id="question3" class="question ">Exchange rate channel</h2><div class="slide-down answer3"><p style="text-align: left;"> Another channel for monetary policy transmission is through the exchange rate of the króna. If interest rates on domestic securities are higher than rates on comparable foreign securities, it will be more beneficial to own domestic securities, provided that the exchange rate of the króna remains stable. By widening the spread between domestic and foreign interest rates, the Central Bank can stimulate capital inflows or curb outflows; i.e., it can stimulate demand for krónur. Under normal circumstances, then, interest rate hikes contribute to a higher exchange rate than would otherwise occur, which in turn tends to lower import prices and inflation, all else being equal. Because movements in the exchange rate of the króna change relative prices of domestic versus foreign goods and services, thereby affecting the competitive position of domestic firms vis-à-vis foreign competitors, they also affect external trade and domestic demand. When the króna appreciates, foreign goods become relatively less expensive than before, which directs demand outside the domestic economy – again, all else being equal. Demand for domestic production therefore contracts, which should also lead to lower inflation. </p></div></li><li id="7d753eaf-0ad5-11e5-93fa-005056bc0bdbplus4" class="plus"><h2 href="#" id="question4" class="question ">Asset price channel</h2><div class="slide-down answer4"><p style="text-align: left;">Central Bank interest rates can also affect the price of assets – equity securities and real estate – thereby affecting households’ and firms’ net wealth. Absent other changes, higher interest rates should lead to lower equity securities prices. There are three reasons for this: first, the present value of expected payment flows in connection with the securities will decline; second, when interest rates rise, demand for bonds increases at the expense of demand for shares, and reduced demand for shares can cause their prices to fall; and third, higher interest rates could increase firms’ financing costs and cut into their profits, which are the premise for payment of dividends to shareholders. By the same token, mortgage interest expense rises, dampening demand for housing and easing upward price pressures in the housing market. Declining share and house prices reduce individuals’ wealth, thereby reducing their proclivity and capacity to spend. Lower share prices also reduce firms’ market value, which makes it relatively less favourable to issue new share capital to finance new development. </p></div></li><li id="7d753eaf-0ad5-11e5-93fa-005056bc0bdbplus5" class="plus"><h2 href="#" id="question5" class="question ">Expectations</h2><div class="slide-down answer5"><p>Finally, monetary policy affects general expectations of future developments in factors such as GDP growth and inflation, and the uncertainty attached to such expectations. Changes in expectations affect the behaviour of financial market agents and others, including individuals’ expectations about the employment outlook and businesses’ expectations about future sales and profits. An increase in Central Bank interest rates can be interpreted to mean that the Bank considers it necessary to slow down economic activity so as to bring inflation to target. In such cases, the GDP growth outlook will have deteriorated in the wake of the interest rate hike, but the likelihood of price stability will have been enhanced. If the monetary policy measure is credible, it should lower inflation expectations and support the actions taken by the Bank to keep prices stable.</p> <p>International research suggests that in general, the impact of monetary policy measures begins to show approximately six months later, and that the bulk of the impact will be discernible one year later. The first effects on domestic inflation generally appear after about a year, and the bulk of them come to the fore by about 1½-2 years after the rate increase. The transmission mechanism in Iceland is broadly as is described in the <a href="/library/Skraarsafn---EN/Working-Papers/WP82_net" title="PDF" target="_blank">handbook for the Bank’s quarterly macroeconomic model (QMM)</a></p> <p>It is worth emphasising that the monetary policy transmission mechanism is subject to change and is highly uncertain as regards, for instance, the strength of the ultimate impact and the time lag between changes in central bank interest rates and the effects of those changes on the domestic economy. It is likely that the effectiveness of monetary policy is determined to a large degree by the effect it has on the general public’s expectations and the level of confidence it enjoys. It is therefore vital to bolster such confidence by conducting monetary policy in a transparent and credible way.</p></div></li></ul></span><div class="l-user-content"><p><strong>Monetary policy transmission mechanism:</strong></p> <p> </p> <p><img alt="" src="/library/Skraarsafn---EN/Monetary-Bulletin/Transmission%20mechanism_150.png" /></p> <p> </p></div><div class="l-user-content"><p style="text-align: left;">A more detailed discussion of monetary policy transmission can be found in Thórarinn G. Pétursson, <a href="/library/Skraarsafn---EN/FromOldWeb/Acrobat-(PDF)/MB014_7.pdf" target="_blank" title="The monetary policy transmission mechanism (PDF)" class="pdf">“The transmission mechanism of monetary policy”</a>, in Monetary Bulletin 2001/4, and in <a href="https://www.cb.is/monetary-policy/central-bank-of-iceland-economic-forecasts/" title="the handbook for the QMM" target="_blank">the Bank's QMM handbook</a>: “QMM: A Quarterly Macroeconomic Model of the Icelandic Economy”, Ásgeir Daníelsson, Lúdvík Elíasson, Magnús F. Gudmundsson, Svava J. Haraldsdóttir, Lilja S. Kro, Thórarinn G. Pétursson, and Thorsteinn S. Sveinsson.</p> <p style="text-align: left;"> </p></div></div> <div class="col-md-offset-3 col-md-9"> <div class="social-icons-blog hidden-print" > <div class="g-plus-blog left"><div class="g-plusone" data-size="tall" data-annotation="none"></div></div> <script type="text/javascript"> (function() { var po = document.createElement('script'); po.type = 'text/javascript'; po.async = true; po.src = 'https://apis.google.com/js/plusone.js'; var s = document.getElementsByTagName('script')[0]; s.parentNode.insertBefore(po, s); })(); </script> <div class="tweet-blog left"><a href="https://twitter.com/share" class="twitter-share-button" data-via="centralbank_is" data-count="none">Tweet</a> <script>!function(d,s,id){var js,fjs=d.getElementsByTagName(s)[0],p=/^http:/.test(d.location)?'http':'https';if(!d.getElementById(id)){js=d.createElement(s);js.id=id;js.src=p+'://platform.twitter.com/widgets.js';fjs.parentNode.insertBefore(js,fjs);}}(document, 'script', 'twitter-wjs');</script></div>  <div class="fb-like left" data-href="" data-send="false" data-layout="button_count" data-width="80" data-show-faces="false" data-action="like" data-font="verdana"></div> <div class="fb-share-button left" data-href="" data-layout="button" data-font="verdana"></div> </div> </div> </div> </div>  <footer role="contentinfo"> <div class="container"> <div class="footer__item footer__item--first"><div class="l-user-content"><h2>The Central Bank of Iceland</h2> <p>Kalkofnsvegi 1, 101 Reykjavík</p>  <a class="footer__link footer__link--map " href="/frontpage/map/" title="A map that shows the location of The Central Bank of Iceland">Map</a> <p> </p> <p>Nat. reg. no. 560269-4129<br /> Swift: SISLISRE</p></div><div class="l-user-content"><div class="vottanir"><figure><a class="equal-pay" href="/about-the-bank/careers/equal-pay-policy/" title="Jafnlaunavottun"><img alt="Equal Pay Certificate" src="/library/Templates/2019/Jafnlaunavottun_an_texta_f_ljosan_grunn.png" /></a></figure><div class="bsi"><figure><img alt="BSI" src="/library/Templates/2019/mark-of-trust-certified-ISOIEC-27001-information-security-management-black-logo-En-GB-1019.png" /></figure><p>IS 755434</p></div></div></div></div> <div class="footer__item footer__item--second"><div class="l-user-content"><h2><a class="footer__link footer__link--phone" href="tel:003545699600" title="Hringja í Seðlabanka Íslands">+354 569 9600</a></h2> <p>Office hours 9 - 12 and 13 - 16<br /> <a href="mailto:sedlabanki@sedlabanki.is" title="Send an email to the Central Bank of Iceland"><span style="text-decoration: underline;">sedlabanki@sedlabanki.is</span></a><br />  </p> <p> <br /> <a href="https://databank.is/" target="_blank">Databank</a><br /> <a href="/publications/newsletter-registration/">Mailing list registration</a></p></div></div> <div class="footer__item footer__item--third"><div class="shortcuts "><h2>Information</h2><div class="shortcut__item"><a href="/about-the-bank/media/" class="shortcut__link"><div class="shortcut__text">Media</div></a></div><div class="shortcut__item"><a href="/other/copyright/" class="shortcut__link"><div class="shortcut__text">Copyright and disclaimer</div></a></div><div class="shortcut__item"><a href="/other/site-map/" class="shortcut__link"><div class="shortcut__text">Site map</div></a></div><div class="shortcut__item"><a href="/other/public-holidays-in-iceland/" class="shortcut__link" target="_blank"><div class="shortcut__text">Public holidays in Iceland</div></a></div><div class="shortcut__item"><a href="" class="shortcut__item ch2-open-settings-btn"><div class="shortcut__text">Cookie Settings</div></a></div></div><div class="shortcuts shortcuts--oneColumn shortcuts--social-icons"><div class="shortcut__item"><a href="https://www.facebook.com/Central-Bank-of-Iceland-110120807198995/" class="shortcut__link icon__Facebook" target="_blank"><div class="shortcut__text">Facebook</div></a></div><div class="shortcut__item"><a href="https://twitter.com/centralbank_is" class="shortcut__link icon__Twitter" target="_blank"><div class="shortcut__text">Twitter</div></a></div><div class="shortcut__item"><a href="https://www.linkedin.com/company/central-bank-of-iceland/ " class="shortcut__link icon__LinkedIn" target="_blank"><div class="shortcut__text">LinkedIn</div></a></div></div></div> </div> </footer> <script src="/LisaLib/GetSupportFile.aspx?id=ac13ad8f-fb15-11e4-93fd-005056bc2afe" type="text/javascript" ></script>   <script async src="https://www.googletagmanager.com/gtag/js?id=UA-10506683-1"></script> <script> window.dataLayer = window.dataLayer || []; function gtag(){dataLayer.push(arguments);} gtag('js', new Date()); gtag('config', 'UA-10506683-1'); </script>  <script type="text/plain" data-consent="analytics"> /*<![CDATA[*/ (function() { var sz = document.createElement('script'); sz.type = 'text/javascript'; sz.async = true; sz.src = '//siteimproveanalytics.com/js/siteanalyze_6035281.js'; var s = document.getElementsByTagName('script')[0]; s.parentNode.insertBefore(sz, s); })(); /*]]>*/ </script> <script src="/LisaLib/GetSupportFile.aspx?id=ac13ad8f-fb15-11e4-93fd-005056bc2afe" type="text/javascript" ></script>  </body> </html>