A 100-Basis Point Icelandic Rate Cut on August 18th

August 24, 2010

A full percentage point reduction of the Icelandic benchmark interest rate to 7.0% last week was twice as much as analysts were anticipating and justified as follows:

Lower inflation, lower inflation expectations, a stronger króna, and the prospect of more rapid disinflation than previously expected provide the scope for a larger interest rate reduction than has generally been the case in the past year. Declining inflation and inflation expectations have caused real Central Bank interest rates to rise since the last interest rate decision date. Although recovery appears to be underway, it is still weak at present, and the outlook is for an output slack to remain for the next few years.

This was the eleventh rate cut of the cycle from a peak of 18% seen from October 2008 until March 2009.  The tenth cut in June had been by 50 basis points.

Officials released a statement that indicated more easing is probable if the krona retains value and inflation falls as forecast.

Copyright Larry Greenberg 2010.



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