apply its instruments in order to attain this objective. furthermore, the bank was assigned the task of maintaining iceland ’ s foreign exchange reserve and contributing to an efficient and reliable financial system, i. e. financial stability. the act also stipulated that the treasury may not borrow from the central bank. specific requirements were made concerning accountability and transparency. for example, the bank is now obliged to present public explanations every quarter of its monetary policy and monetary, exchange rate and currency developments, and its measures in these areas. as i said earlier, the main objective of central bank monetary policy is to keep inflation as close as possible to 2½ %. the central bank has only a single instrument for achieving this objective : interest rates. the crucial interest rate here is that used in the central bank ’ s repurchase transactions with credit institutions, sometimes called the policy interest rate. such transactions effectively represent the bank ’ s liquidity facility for these institutions. the commercial and savings banks then decide their own rates of interest with reference to the central bank ’ s policy rate and short - term interest rates invariably alter in pace with the central bank rate. other things being equal, changes in the central bank interest rate also affect long - term interest rates, but other factors have an impact as well. their responses to the central bank ’ s interest rate changes are therefore not always foreseeable and tend to take place with some lag. inflation forecasting plays a crucial role in the central bank ’ s current activities. it produces four forecasts a year and publishes them in its quarterly monetary bulletin. the inflation forecast is projected just over two years into the future, on a quarter - by - quarter basis. as in other countries, central bank interest rate changes take a long while to have an impact on the economy. the inflation forecast therefore needs to be forward - looking and based on the best available methodologies. besides inflation forecasting, the central bank publishes a quarterly assessment of the economic and monetary situation and prospects, including a national economic forecast, and their probable impact on price developments. if inflation is heading beyond the bank ’ s target on a longer - term scenario, the bank raises its policy interest rate, but cuts it if inflation is heading below the target. in preparing its inflation forecasts and regular assessments of the economic situation and prospects, the central bank examines a wide range of indicators. these are both statistical data and information obtained from interviews with representatives of industry, organisations with vested interests, credit institutions and others. the

bank publishes the bulk of its statistical indicators and data on its website. central bank decisions are made after in - depth examinations of indicators about economic developments, its assessment of the situation and outlook, the assumptions behind the inflation forecast and the inflation forecast itself. under the central bank act, the bank ’ s board of governors have set internal rules on the preparations of, arguments for and presentation of its monetary policy decisions. these rules were formally set in the beginning of 2002 and published in the quarterly monetary bulletin. having said this, it is tempting to try to assess the success of monetary policy implementation after the framework was changed and the new central bank act went into effect in spring 2001. there was already some inflation in spring 2001 and a rapid slide in the exchange rate of the krona until the end of november 2001 caused inflation to increase substantially, from around 4 % when inflation targeting was adopted to 9½ % in the beginning of 2002. inflation surged following heavy demand pressure in the economy which was driven by large - scale credit expansion and resulted in an enormous current account deficit, peaking in 2000 at 10 % of gdp. for most of the period of overheating the central bank did not follow a direct inflation target and the backbone of monetary policy was a fixed exchange rate, with a fluctuation band, i. e. a soft exchange rate peg. nonetheless, the central bank sought to counter inflationary pressures as soon as 1999 and began raising interest rates, which caused the krona to strengthen until spring 2000. expectations changed then, partly under the impact of the wide current account deficit, and the currency inflow diminished. a downward exchange rate trend then began. the bank raised its policy interest rate in phases until the end of 2000 when it reached 11. 4 %, where it remained until spring 2001 when a minor cut was made. the interest rate remained unchanged until late 2001 when the bank felt it could discern clear signs that inflation was beginning to come down again. by then, the exchange rate of the krona had fallen by almost one - third from its highest point in spring 2000. by then the central bank had repeatedly stated that the exchange rate of the krona had become much weaker than warranted by economic fundamentals. the impact of the tight monetary stance was increasingly felt as the year 2001 wore on. the sharp turnaround in the exchange rate at the end of november that year and the agreement between the federation of icelandic labour and confederation of employees in december 2001, postponing an