Central Bank of Iceland Halts Trend Toward Lower Interest Rates

July 2, 2009

Iceland’s central bank kept its key policy rate unchanged at 12% and warned that higher rates might become necessary if selling pressure on the krona and accompanying upward pressure on inflation and expected inflation doesn’t cease.  Last October, an IMF-arranged aid package for Iceland mandated a 600-basis point rate hike to 18%, but that entire increase intended to protect the crown was reversed in four subsequent cuts of 100 basis points on March 19, 150 bps on April 8, 250 bps on May 7 and 100 bps on June 4.

Today’s statement from the Sedlabanki acknowledges that that hasty retreat in interest rates has subjected the Icelandic crown to unacceptable selling pressure despite capital controls, which in turn raised CPI inflation to 12.2% in June form 11.6% in May.  Indications of expected inflation have also climbed.

Copyright Larry Greenberg 2009.

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