Central Bank of Iceland

May 21, 2014

Officials left the one-week collateralized central bank lending rate unchanged at 6.0% for the twelfth policy meeting in a row dating back to December 2012.  The last change, a 25-basis point hike in November 2012, culminated a six-step tightening begun in August 2011 from a base of 4.5%.

In a released statement, officials said the real central bank rate had risen to a neutral zone as a result of declining inflation and short-term inflation expectations but added, “increased growth in domestic demand in the near term will probably require further increases in the Bank’s real interest rate, other things being equal. The more other measures, including restrictive fiscal policy, pull in the same direction as monetary policy, the less need there will be for a tighter monetary stance. ….Whether a change in the Bank’s nominal interest rates is warranted in the near future will depend on the future path of inflation and inflation expectations.”  In short, the duration of how much longer a 6% interest rate is retained is left ambiguous, although no hike appears imminent because inflation is projected to hover around a target of 2.5% until next year.

Policymakers next meet on June 11th.

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

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