The only way to  2  BIS Review 18/2003  fix the exchange rate while still retaining an independent currency is to return to the old regime and introduce currency controls, but who would want to return to such an arrangement? Exchange rate volatility is best prevented with economic policies which promote economic stability, but this does not only depend on the Central Bank. It is essential to take a long-term perspective. However, it should be noted that since September last year the Central Bank has been regularly purchasing currency in the foreign exchange market in order to boost its external reserve. The Bank’s purchases of currency have amounted to more than 13 b.kr. since that time, and have undoubtedly weighed somewhat against the appreciation of the króna in the short run, although the long-term effect is negligible, if any at all. The Central Bank’s main monetary instrument is the interest rate on its repo agreements with credit institutions. In response to anticipated overheating of the economy the Central Bank began to raise its interest rates as early as 1997 and raised them rapidly in 1999 and 2000. In the beginning of 2001 the policy rate was up to 11.4%. Since then the Central Bank has lowered its policy rate 13 times and it now stands at 5.3%. Admittedly this is a higher level than among neighbouring countries such as the euro region, which have to tackle the problems of persistent economic weakness and high unemployment.
or above as soon as the deposit in the payer’s account allows this to be done. The system thereby transfers payment orders, which are above the minimum needed to qualify for the RTGS system, directly to or from participants’ current accounts with the Central Bank. The RTGS system has a triple function. Firstly, the Central Bank uses the system for the implementation of its monetary policy; secondly, it is used in transactions by credit institutions with the Central Bank; and thirdly, it is used for gross settlements between credit institutions. The security and functionality of this system are thereby preconditions for enabling the Central Bank to achieve its objectives for both price and financial stability. Consequently, operation of the RTGS system has been assigned to the Central Bank, a familiar arrangement from many other countries. The Bank’s duty is to strengthen the security, efficiency and independence of the system. At the end of 2002 agreements were made with all system participants specifying payment authorisations and collateral security for settlements. This represented a major step towards bringing arrangements for the credit institutions’ transactions with the Central Bank into harmony with best international practices. Automatic Central Bank guarantees for settlements in the RTGS system are thus a thing of the past. Work is still in progress on developing the system. This year it is expected that the rules governing it will be revised, its independence be enhanced, collateral security amounts for settlements be reviewed, handling times be shortened and settlement limits be lowered.