Central Bank of Iceland Elects Not to Cut Interest Rate at February Meeting

February 4, 2015

The seven-day Icelandic rate had been cut by 50 bps in December and 25 bps in November 2014, reversing 43% of a previous 175-basis point rise in six steps between August 2011 and November 2012.  A statement released by the Monetary Policy Committee explains why a further deceleration of inflation to 0.8% in December-January did not prompt yet another cut of the central bank interest rate.

Reductions in global fuel prices are beyond the scope of domestic monetary policy, however, and the disinflation resulting from them is temporary. Therefore, in determining interest rates, it is not possible to take full account of the disinflation stemming from this source. The outlook for the labor market is also highly uncertain, and at the same time, there are signs of strong GDP growth in the near future. For this reason, the MPC considers it appropriate to wait until the economic situation becomes clearer, particularly as regards wage developments.

The statement revises projected growth in 2015 to 4.2% from 3.5% and does not anticipate a rise of inflation back to the 2% target before sometime next year.  The krona has been stable, but the prevalence of above-average uncertainty on a number of issues is stressed.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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