Central Bank of Iceland Slashes Key Rate to 13% from 15.5%

May 7, 2009

The statement by Icelandic monetary authorities frames today’s 250-basis point rate cut as part of a shifting macroeconomic policy mix toward tighter fiscal policy and easier monetary policy.  Prospects for krona appreciation in the medium-to-longer term, greater disinflation than expected previously, and an endogenous tightening of monetary conditions as commercial bank operations normalize also justify a “cautious but significant” decline in central bank rates.  In three moves on March 19, April 8, and today, officials have reversed 500 basis points of a 600-bp rate hike last October 28th, mandated then as a key condition for Iceland receiving a loan from the IMF.  The next monetary policy meeting is scheduled for June 4, and rates are likely to get lowered again at that time.

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