Iceland’s Interest Rate Hike

May 16, 2012

Many analysts were surprised by today’s announced increase of the Bank of Iceland’s 7-day collateralized rate to 5.5%.  The three prior increases on March 21, November 2, and August 17, 2011 were by 25 basis points, and the escalating euro debt crisis dissuaded some from expecting any Icelandic move now.

A statement on the Sedlabanki web site conspicuously omits calling current interest rate levels “appropriate” and warns that “if inflation does not subside in the next few months, other things being equal, it will be necessary to raise nominal interest rates further in order to ensure that inflation returns to target.”

The statement mentions the stronger-than-expected domestic demand-led economic recovery.  A 10.5% plunge of GDP between 2008 and 2010 is expected to have been more than half-way reversed by later this year.  On-year CPI inflation of 6.4% is little improved from December’s 6.5% and around double the pace in the previous statement year.  Officials would like to see a more robust tone in the krona.

Between March 2009 and February 2011, Iceland’s interest rate underwent fifteen reductions totaling 1575 basis points to a low of 4.25%.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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