Central Bank of Iceland

December 11, 2013

Analysts didn’t get the 25-basis point central bank rate hike that they were anticipating, but the accompanying statement from Iceland’s Monetary Policy Committee underscored that today’s delayed action is only a delay and not a policy guidance rethink.  The statement observes faster growth than assumed previously — such averaged 3.1% annualized in January-September — and reaffirms that wage behavior will have a big influence on the future path of the key interest rates.

A stronger economic recovery and the above-mentioned Government measures will require more rapid monetary tightening than previously expected, other things being equal. The degree to which such tightening takes place through changes in nominal Central Bank rates will depend on future inflation developments, which in turn will depend on wage developments and exchange rate movements.

Rate tightening has been paused since November 2012 when the seven-day Icelandic collateralized lending rate was hoisted to 6.0% from 5.75%.  That was the sixth increase since August 2011.  Five of the moves were by 25 basis points, and the other was a 50-bp increment in May 2012. Iceland’s krona has been buoyed by the relatively high interest rates, rising against the euro this year.  This development has depressed inflation, which nonetheless still exceeds the central bank target of 2.5%.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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