Central Bank of Iceland

May 11, 2016

Inside of less than a six-month span, the seven-day collateralized Icelandic lending rate was raised three times by 50 basis points each between June 2015 and last November to the current 6.5% level.  Such is four times greater than April’s on-year pace of CPI inflation.  Those tightenings of policy represented a normalization process and pre-emptive action against growing domestic inflationary pressure.  A released statement unequivocally attaches a tightening bias to future policy changes but continues to back off the urgency of acting sooner rather than later.  Import prices continue to fall because of krona appreciation and low global inflationary pressure. 

Global price developments and a stronger króna have provided the scope to raise interest rates more slowly than was previously considered necessary. By the same token, there are signs that monetary policy has anchored inflation expectations more securely than before and contributed to a more moderate rise in inflation than could have been expected in the wake of large pay increases.

The future path of interest rate hikes will hinge on data pertaining to inflation and inflation expectations.

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



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