Central Bank of Iceland Cuts Policy Rate to 15.5% from 17%

April 8, 2009

Despite a 9% drop of the Icelandic krona since the central bank implemented an initial 100-basis point rate cut on March 19th, today’s reduction of 150 bps continues the policy of cautiously dismantling a draconian policy stance mandated last October by the IMF.  Price stability is the long-term goal of monetary policy, but currency stability to protect balance sheets while Iceland restructures is the governing principle of policy in the short term.  A statement released by monetary officials claims that the krona’s erosion over the past month was unrelated to the rate cut in March and asserts that the krona will recoup the loss soon.  Meanwhile, inflation is projected to continue to fall rapidly in line with very depressed domestic demand, and the statement also observes that corporate inflation expectations have retreated rapidly as well.  Last year, the policy rate was raised in March by 125 basis points to 15.0% and by another 50 bps in April.  Then amid a national economic collapse, officials first cut the policy rate by 350 bps to 12% on October 25th and then lifted it back to 18% three days later as a key stipulation of an aid package negotiated with the IMF.  Iceland also imposed capital controls.

Copyright 2009 Larry Greenberg. All rights reserved.  No secondary distribution without express permission.

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