Central Bank of Iceland Cuts Rates by 50 Basis Points

March 17, 2010

The eighth Icelandic rate cut in twelve months was announced today, reducing the seven-day lending rate by a further 50 basis points to 9.0%, exactly half of the peak level from October 2008 to March 2009.  A statement from monetary officials reads similarly to that of January 27 when officials cut by rates also by 50 basis points.  The prior cuts were much larger, but the maneuvering room of officials is now limited by significant uncertainty regarding Iceland’s access to international capital markets in light of its negative credit rating outlook.  CDS spreads remain elevated, and CPI inflation accelerated in February to an underlying pace of 5.9% from 5.2% in January.  The uptick was anticipated by Bank officials, who still believe core inflation will be back in target by end-2010.  Although a further acceleration in March seems likely, further rate increases in the future will occur if the krona stays stable and the inflation prognosis remains as it is currently.

The amounts of prior Icelandic rate cuts were 100 bps in March 2009, 150 bps in April, 250 bps in May, 100 bps in June, 100 bps in November, 100 bps in December and 50 bps in January.  An IMF-imposed jump to 18% from 12% was made in October 2008 as a quid pro quo for receiving aid.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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