Icelandic Monetary Tightening Paused

August 22, 2012

Sedlabanki, the Central Bank of Iceland, left its key seven-day collateralized lending rate at 5.75%, which constitutes a pause in a trend of five increases since August 2011 and most recently on June 13, 2012.  Four of those hikes were by 25 basis points and the other in May of this year was by 50 bps.  A statement today 

  • Lifts projected economic growth this year by a half percentage point to 3.1% and projects growth in 2013-4 that averages 2.8% a year.
  • Speaks also of an “improved” inflation outlook but cautions that return to the target of 2.5% is unlikely until around mid-2014.
  • Warns of some upside price risks, for example if the recent better tone of the krona reverses, and reiterates that monetary policy eventually will need to be made less accommodative as space capacity is reabsorbed.

The statement concludes

The accommodative monetary stance has supported the economic recovery. The interest rate increases in May and June, together with reduced inflation, have withdrawn some of that accommodation. As spare capacity disappears from the economy, it is necessary that monetary policy slack should disappear as well. The degree to which such normalization takes place through higher nominal Central Bank rates will depend on future inflation developments.

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

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