Central Bank of Iceland Tightens

March 21, 2012

Monetary officials at Sedlabanki tightened the 7-day collateralized lending rate for a third time in seven months.  The benchmark was also raised last August and November and now stands at 5.0%.  From March 2009 through February 2011, fifteen easings occurred, totaling 1,375 basis points.  The prior meeting in early February left policy unchanged but warned that a hike in the near term would be likely, since policy is quite accommodative and inflation exceeds target.

Today’s statement notes that the krona has weakened recently and “the short-term inflation outlook has deteriorated somewhat from the forecast prepared at that time. Further ahead, there is the risk that inflation will remain above the Bank’s inflation target for a longer period than projected unless the króna appreciates in coming months. …. It will be necessary to withdraw the current degree of monetary accommodation as the recovery progresses and the slack in the economy diminishes. The degree to which such normalization takes place through higher nominal Central Bank rates will depend on future inflation developments. In the absence of an improvement in the inflation outlook, a further increase in nominal interest rates will probably be required in the near term in order to bring the monetary policy stance, which is still quite accommodative.”  The next meeting is scheduled for May 16.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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