This is why the Riksbank often allows monetary policy to be guided by the CPIF inflation measure – a measure of underlying inflation that is not directly affected by changes in mortgage rates and therefore is not impacted by this effect (see Figure 4). The fact that the CPI is impacted by changes in the interest rate in this way is of course something the Riksbank was aware of when the inflation target was introduced. The choice was still made to define the target in terms of the CPI, as the CPI is a broad price index that represents normal purchases and is familiar to the general public. But as the Riksbank has pointed out, measures of underlying inflation are also used to obtain indications of the more lasting inflationary pressures. CPI inflation is constantly affected by temporary factors, which there is no reason to counteract with monetary policy – for instance, the direct effect on interest expenditure of the Riksbank's own monetary policy. Underlying measures, such as the CPIF, have thus often been used to guide monetary policy.2 Twenty years is a long time, and one might expect that the effects of fluctuations in interest rates on the interest-expenditure component in the CPI would offset one another. The average inflation rate according to both the CPI and the CPIF would therefore be roughly the same. However, this is not the case. The average rate of inflation measured in terms of the CPIF during the period 1995-2012 is 1.8 per cent.
In practice, the Central Bank has allowed the exchange rate to move within the band to the extent that it deems such movements consistent with its long-term goal of maintaining low inflation. Now the exchange rate is roughly 3.5% above the central rate and has appreciated by 2.7% since the middle of June when the Central Bank raised interest rates for the second time this year. In our present situation, we have sought to increase the transparency of our operations by explaining as thoroughly as we can the targets of monetary policy, our instruments, our methods, the assessments  3  BIS Review 117/1999  that underlie our policy in general and our individual actions in particular. This we do through our regular publications and interviews with the press. This is important in order to broaden the understanding of the main principles which underlie our monetary policy and its implementation. Financial supervision As you may know, until the end of last year, the Central Bank was responsible for the supervision of the operations of all financial institutions in Iceland except insurance companies. At the beginning of 1999, the Bank Inspectorate of the Central Bank and the Insurance Supervision Authority were merged into a new Financial Supervisory Authority which has the responsibility for supervising the operations of all financial institutions in Iceland. The change was in a way modelled on decisions which had been taken in some other countries, such as the United Kingdom.