Icelandic Central Bank Rates Cut 50 Basis Points

June 23, 2010

Sedlabanki has implemented the fourth rate cut of 50 bps this year and the tenth reduction since March 2009.  The seven-day lending rate is now 8.0%, 1000 basis points lower than such had been from October 2008 until March 2009 after securing aid from the IMF.  The six reductions in 2009 had totaled 800 basis points.  Previous cuts this year were announced on January 27, March 17 and May 5.  Officials have left the door open to further rate cuts in the future.

The scope for easing rests on three factors according to Iceland’s latest central bank statement. 

  • Currency resilience:  The krona had gained 6% against the euro since the May meeting and 5% on a trade-weighted basis.  No intervention support has been necessary.  The dismantling of capital controls is likely to begin soon.
  • Falling inflation consistent with the central bank’s forecast:   On-year CPI inflation was 7.5% in May after 8.3% in April.  Excluding the impact of mandated higher taxation on consumption, inflation was 6.1% after 6.9% in April.  Officials foresee in-target inflation by early next year.
  • Reduced sovereign risk premia.

Iceland’s international reserves are mostly borrowed.  As improving conditions permit, officials intend to buy foreign currency that will substitute owned reserves for what they have now.  This process may dampen upward pressure on the krona.  Icelandic GDP expanded 0.6% at an annualized rate last quarter.

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

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