Central Bank of Iceland

June 15, 2011

Iceland’s central bank, Sedlabanki, left its interest rates unchanged including a 4.25% seven-day lending charge.  The statement posted today on the central bank’s web site is more hawkish than the prior one of April 20.  Gone is a sense of agnosticism about the direction of the next policy change.  If indeed the next move is tightening, it will end a spectacular 15-move easing of 1,375 basis points from a 18.0% to 4.25% between March 2009 and February 2011.  Icelandic CPI inflation has risen from 1.8% in January to 3.4% as of May, and officials are now distressed that wage demands have become excessive.  The statement concludes, “as the recovery progresses, wage pressures stemming from the traded goods sector may therefore cause longer-term inflation expectations to drift upwards. To reduce the risk of such an outcome, tighter monetary policy may become warranted in the near term.”

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

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