Iceland’s 13th Central Bank Rate Cut Since March 2009

November 3, 2010

Sedlabanki reduced all its key interest rates by 75 basis points, including the seven-day collateralized lending rate to 5.5%.  Following an IMF mandate, that rate was hiked by 300 basis points to 18.0% in October 2008 around the time that many other central banks began to ease policy aggressively.  Six cuts totaling 800 basis points were implemented in 2009, and today’s move was the seventh reduction of 2010, totaling a further 450 basis points.  The previous cut on September 22 was also 75 bps in size.

There will likely be more rate reductions at future policy meetings but perhaps not immediately.  In a statement released today by officials, the following guidance is given:

If the króna remains stable or appreciates and inflation subsides as forecast, the premises for some further monetary easing should be in place. However, the prospect of removing the capital controls creates uncertainty about short-term room for manoeuvre.

CPI inflation over the past six reported months fell five percentage points to 3.3% in October from 8.3% in August.  That’s more than officials had expected, and the drop if one excludes the impact of a higher consumption tax was to 2.6% from 6.9%.  A further ebbing of inflation is now projected because of downwardly revised economic growth in 2010 and 2011, falling inflation expectations, and continuing appreciation of the krona, which is about 1% firmer than when policymakers met in late September. 

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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