Central Bank of Iceland

February 12, 2014

Sedlabanki officials left Iceland’s seven-day collateralized interest rate at 6.0%, where such has been for the past fifteen months.  Five hikes of 25 basis points and one in May 2012 of 50 bps lifted the monetary policy rate from 4.25% prior to August 2011 to 6.0% by November 2012.  The last ten policy meetings including today’s did not change the rate level. 

A statement from the Monetary Policy Committee delivers different messages regarding policy in the near term and what will need to be done from the second quarter of 2015 onward.  Projected inflation drives both of these views.  Due to recent appreciation in the krona and steadier unit labor cost pressure than assumed,

inflation will therefore be lower this year than previously anticipated and will be close to target [of 2.5%]. The inflation outlook for the coming two years has deteriorated since the November forecast, however, as the outlook is for the slack in the economy to give way to an output gap during the period.  The outlook for stronger domestic demand growth will require that the monetary stance be tightened sooner and more than previously expected.

Revised macroeconomic projections now look for real GDP to expand by 3.7% in 2015 and 3.0% in 2016 but have bumped down predicted inflation in 2014 by a half percentage point to 2.7%.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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