Iceland’s Central Bank Tightens and Suggest More Restraint May Follow

November 7, 2018

A 25 basis point increase of the Bank of Iceland’s 7-day term rate to 4.50% was the first tightening since November 2015. In between, the benchmark had been reduced by 50 basis points in August 2016 and 25 basis point each in May 2017, June 2017, and October 2017. Today’s rate reversal comes in response to faster-than-assumed Icelandic growth, above-target CPI inflation, and upwardly creeping measures of expected inflation. The inflation target is 2.5%, and officials now anticipate inflation staying above that level next year, according to a statement released today.

The MPC reiterates that it has both the will and the tools necessary to keep inflation at target over the long term. If inflation expectations continue to rise and remain persistently at a level above the target, it will call for a tighter monetary stance. Other decisions, particularly those relating to the labour market and fiscal policy, will then affect the sacrifice cost in terms of lower employment.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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