The Monetary Policy Committee of the Central Bank of Iceland: seven years on

Abstract

The Central Bank of Iceland Monetary Policy Committee (MPC) has been active for more than seven years. When Iceland’s monetary framework was revised with a 2009 statutory amendment providing for the appointment of a monetary policy committee, consideration was given to international precedents on best practice for monetary decision-making. Other changes focused on increased transparency and credibility of monetary policy. A study of the MPC’s voting patterns during the period 2009-2015 reveals divergent points of view among Committee members. Nearly half of the MPC’s decisions were not unanimous: in one-third of instances, one member voted against the majority, and in nearly one-seventh of instances, two members voted against the majority. When there has been a disputed decision, the majority has consisted more often of both internal and external members than of internal members only. The composition of the minority has also varied somewhat over the period in question. The voting patterns of the Icelandic MPC appear to be similar to those in neighbouring countries with a similar monetary policy framework. The revision of the framework for monetary decision-making appears to have been a change for the better. The Icelandic economy has recovered from the financial crisis and appears to be better balanced than before. Inflation has been below the Central Bank’s inflation target for about two-and-a-half years, and long-term inflation expectations have subsided. It can be assumed that the success of monetary policy in recent years has played a role in anchoring expectations more firmly. Other factors have also played an important part in the recent economic recovery, however.