Icelandic Rate Cut: The First of Several

March 19, 2009

The Central Bank of Iceland cut its benchmark rate to 17% from 18%, embarking on a cautious path of monetary easing.  Step number two, which should entail a reduction of at least a full percentage point,  will likely be made on April 8th.  To halt a run on the Icelandic krona, the IMF mandated a six-percentage point rate hike last October 28th.  Before then, the key rate had been cut by 350 bps on October 15, raised 50 bps last April 10th, and lifted 125 bps on March 25, 2008.  Icelandic CPI inflation fell to 17.6% in February from a peak of 18.6% in January.  There is a severe recession.

The central bank released a statement, observing that inflation to be subsiding faster than anticipated, the krona more stabilized, a swing in trade from significant deficit into sizable surplus, and rapid corrections happening in real wages and domestic demand.  Moreover, the financial system is under reconstruction.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.


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