Central Bank of Iceland

March 19, 2014

Sedlabanki’s one-week collateralized lending rate will continue to be at 6.0%, the level since the last of six 25-basis point hikes engineered between August 2011 and November 2012.  A statement released by officials noted that inflation lately has fallen more than expected but retained a long-term bias toward further tightening as unutilized productive resources get reabsorbed.  The amount by which interest rates need to go eventually higher could be blunted if fiscal consolidation and structural reforms to lift productivity are enacted.  In the short term, by contrast, it’s possible that the interest rate could be cut.

Because inflation is lower, the króna stronger, and wage increases smaller than was forecast in February, the medium-term inflation outlook has improved from previous estimates. Short-term inflation expectations have also declined in line with falling inflation, although long-term inflation expectations are still well above target.  The outlook for increased growth in domestic demand in coming quarters will, other things being equal, call for an increase in the Central Bank’s real rate.  For the short term…..whether there is scope for a nominal interest rate reduction will depend on developments in inflation and inflation expectations in coming months.

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

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