Icelandic Monetary Policy in Limbo

April 20, 2011

For a second meeting in a row of the Sedlabanki Monetary Policy Committee, the 7-day collateralized lending rate has been kept unchanged at 4.25%.  From a peak of 18%, the key rate had been reduced fifteen times starting with a 100-bp cut on March 2009 through a 25-bp move on February 2 of this year.  A statement posted today on the central bank web site calls the outlooks both for inflation in the near term and growth in jobs and GDP “deteriorated.”  Amid evidence of rising expected inflation, no scope exists for cutting rates further, but officials do not rule out a reduction in the future and hold out hope that inflation will drop back to the 2% target next year after peaking at 3%.  They frankly remain agnostic about the direction of their next interest rate change:

The direction of future policy moves remains uncertain. The MPC stands ready to adjust the monetary stance as required to achieve its interim objective of exchange rate stability and ensure that inflation is close to target over the medium term.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.

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