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.
Given the fact that Iceland is not a member of the European Union, membership in EMU is out of the question. Nevertheless, the establishment of EMU will affect Iceland, particularly in the longer term. A few facts may be mentioned: first, the European Union is an important trading partner, but the absence of Denmark, Sweden and the UK from the EMU means that only about a third of our external trade is with EMU countries at present. Once the three countries join EMU, which we expect them to do, the share of EMU countries in our external trade will rise to above 60%. Second, we expect that our economic performance will be measured by the markets against the criteria developed for the EMU countries. Third, we expect that a successful EMU will bring beneficial effects to Iceland in the form of increased demand for our exports and reduced transaction cost in external trade. Fourth, it might become a greater challenge to operate our own currency. One could, for example, envisage that a currency like ours would be increasingly subjected to pressures from international investors seeking to diversify portfolios, adding currencies on the edge of the euro area and closely linked to it. This could conceivably lead to increased volatility and consequent potential instability down the road. The immediate effects on Iceland of the establishment of the EMU have not been significant. However, the entry of Denmark, the United Kingdom and Sweden into the EMU will markedly change our situation.