Economy of Iceland - Currency and Monetary Policy

Currency and Monetary Policy

The currency of Iceland is the króna (plural: krónur), issued exclusively by the Central Bank of Iceland since the bank's founding in 1961. The exchange rate in 2008 was 78 krónur to the United States dollar, down from 97.43 in 2001. Iceland's Krona went from 60 to the dollar in November 2007 to 147 to the dollar in November 2008.

Monetary policy is carried out by the Central Bank of Iceland, which maintains a 2.5% inflation target rate, adopted in March 2001.

During the 1970s the oil shocks (1973 and 1979 energy crisis) hit Iceland hard. Inflation rose to 43% in 1974 and 59% in 1980, falling to 15% in 1987 but rising to 30% in 1988. Iceland experienced moderately strong GDP growth (3% on average) from 1995 to 2004. Growth slowed between 2000 and 2002, but the economy expanded by 4.3% in 2003 and grew by 6.2% in 2004. Growth in 2005 exceeded 6%. Inflation averaged merely 1.5% from 1993–94, and only 1.7% from 1994-95. Inflation over 2006 topped at 8.6%, with a rate of 6.9% as of January 2007. Standard & Poor's reduced their rating for Iceland to AA- from A+ (long term) in December 2006, following a loosening of fiscal policy by the Icelandic government ahead of the 2007 elections. Foreign debt has risen to more than five times the value of its GDP, and Iceland's Central Bank has raised short-term interest rates to nearly 15% in 2007. Due to the plunging currency against the euro and dollar, in 2008 inflation is speculated to currently be at 20-25%.