A Pause in Icelandic Monetary Easing

March 16, 2011

After peaking at 18% in October 2008, the Sedlabanki seven-day lending rate was cut by 800 basis points in 2009, 550 bps in 2010, and by 25 basis points to 4.25% at the first policy meeting of this year on February 2.  In announcing no further easing today, a released statement from monetary officials observed somewhat weaker development in economic activity but also commodity-induced upward inflationary pressure.  The trade-weighted krona is 5.5% weaker than its peak last November.  Although medium-term inflationary expectations remain well anchored, short-term price expectations have drifted up.  The statement leaves the timing and direction of the next rate change ambiguous.

With the prospect that inflation will remain near target and with interest rates at a historically low level, the direction of future policy moves remains uncertain. In addition, the prospect of removing the capital controls creates uncertainty about short-term room for manoeuvre. The MPC stands ready to adjust the monetary stance as required.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.



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