Central Bank of Iceland

May 17, 2017

A stronger anchor for inflation expectations at target and the appreciation of the kr├│na have enabled the Monetary Policy Committee to achieve its legally mandated price stability objective with a lower interest rate than would otherwise have been possible.

Officials undertook a third cut of the 7-day repo rate during the past year, but at 4.75%, such remains well above inflation of 1.9% and constitutes a tight stance. A released statement says the GDP output has strengthened since the last full review in February, but the boost to inflation from stronger demand pressure┬áhas been offset by upward pressure on the krona, which will be suppressed by intervention to a lessening extent in the future. The krona’s strength reflects Iceland’s tourism boom and is thus fundamental rather than speculative in nature.

Today’s rate cut of 25 basis points augments cuts of 50 basis points last August and 25 bps in December, but it doesn’t quite offset a trio of prior cuts of 50 bps each in June and August 2015 followed by 25 bps in November 2015.

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

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