Inflection Point in Icelandic Monetary Policy

February 8, 2017

The Monetary Policy Committee retained a 5.0% seven-day repo rate but released a statement that projects rising demand-side pressures, a possibly tighter labor market, and seemingly redirects the bias of policy from ease toward restraint. Economic growth was around 6% last year compared to the Bank’s assumption made last November of 5%.

The last two interest rate adjustments were cuts of 50 basis points last August and 25 bps in December, but the concluding paragraph dispels the likelihood of a further rate reduction near term and suggests that the next rate change is perhaps likelier to be upward than downward.

Rapid growth in economic activity and clear signs of growing demand pressures in the economy call for a tight monetary stance to ensure medium-term price stability. A stronger anchor for inflation expectations at target and the appreciation of the króna have enabled the MPC to achieve its legally mandated price stability objective with a lower interest rate than would otherwise have been possible. Strong growth in demand and unrest in the labour market call for caution in interest rate setting. The monetary stance in the coming term will be determined by economic developments and actions taken in other policy spheres.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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