Bank of Iceland to Raise Interest Rates Before Long

May 13, 2015

Although the 7-day Icelandic repo rate of 4.5% was left unchanged, officials signaled that a hike is coming. “The Bank’s interest rate reduction late in 2014 was based on a sharp drop in inflation and the decline in inflation expectations, which led to a larger rise in real rates than was considered warranted at that time by economic conditions and the near-term outlook. At that time, however, the Committee pointed out that large pay increases and strong growth in demand could undermine the recently achieved price stability and require that interest rates be raised again. Recent developments in wage negotiations, in conjunction with the increase in inflation expectations and indications of strong growth in demand, suggest that these conditions are now materializing; therefore, it is likely that it will be necessary to raise interest rates at the MPC’s next meeting, which will take place in June.”

Copyright 2015, Larry Greenberg.  All rights reserved.

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