Icelandic Benchmark Interest Rate Not Raised Further

September 21, 2011

A shifting direction in Icelandic monetary policy had been signaled in a more hawkish statement from the Central Bank of Iceland in mid-June and acted upon with a 25-basis point increase on August 17 of the 7-day collateralized lending rate to 4.5%.  Between March 2009 and February of the current year, fifteen cuts had reduced such from 18.0% to 4.25%, and August’s increase was the first tightening since October 2008.  The statement of August 17th implied that more increases would follow to contain inflation and reduce potential pressure on the krona. 

Events since August 17 raised sufficient doubts about the strength of future Icelandic growth and inflation to warrant not implementing a second tightening as quickly as now.  Today’s statement on the Sedlabanki web site reaffirms that a “gradual withdrawal of monetary accommodation” will likely continue but balances that assertion by also adding that “somewhat more favorable-than-expected inflation figures in August, continued strengthening of the kr√≥na, and a weaker outlook for the global economy allow the Committee to keep rates on hold at present.”  CPI inflation of 5% is running at twice the medium-term target, while real GDP slumped 2.8% last quarter after rising 1.9% in 1Q. 

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

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