Central Bank of Iceland

February 10, 2016

Iceland’s Monetary Policy Committee previously raised its seven-day collateralized lending rate from 5.25%  to 5.75% in June 2015, to 6.25% in August 2015, and to the current level of 6.5% this past November.  Monetary policy has been tightening in Iceland even as other central banks in Europe like the ECB adopted looser stances.  This contrast is explained in statement, which in discussing the trend in productive resources asserts that “the margin of spare capacity is estimated to have disappeared last year, and the outlook is for a widening positive output gap. Pay rises well in excess of the inflation target and productivity growth exacerbate inflationary pressures.”  However, the outlook for Icelandic inflation has become less, not more, urgent since November’s rate increase because of “developments in global energy and commodity prices and the exchange rate of the króna. Inflation has been lower than was forecast in November and appears set to remain so into 2017.” 

Icelandic monetary policy as a consequence was not tightened further at today’s meeting, but the statement maintained a statement that sees the next moves being ones toward less accommodation.  Inflation is assumed likely to rise to 3% by the end of this year and 4% by the end of 2017.

Global price developments and a stronger króna have provided the scope to raise interest rates more slowly than was previously considered necessary. However, this does not change the fact that, according to the Bank’s forecast, a tighter monetary stance will probably be needed in the coming term, in view of growing domestic inflationary pressures.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



Comments are closed.