Central Bank of Iceland Tightens Further

June 13, 2012

Rate increases at Sedlabanki last August (25 basis points), November (25 bps), March (25 bps) and May (50 bps) were followed up today by a fifth increase, this time of 25 basis points.  The seven-day collateralized lending rate now becomes 5.75%, and like the increase in May, analysts had not anticipated the latest move.  A statement of explanation asserts that “the accommodative monetary stance has supported the economic recovery in the recent term” but adds that “raising interest rates in May and again now, in June, has withdrawn some of that accommodation, as is appropriate in view of the recovery of the real economy and the deteriorating inflation outlook. As the recovery continues and spare capacity disappears, it is necessary that the monetary policy slack should disappear as well. The degree to which such normalization takes place through higher nominal central bank rates will depend on future inflation developments.”  Officials continue to fret about krona depreciation:  “Inflation subsided somewhat in May; however, the outlook is for it to remain above the Bank’s target for longer than is acceptable, particularly if the króna remains weak.”

Iceland had its own economic and banking crisis, which were addressed much more successfully than the more recent difficulties of Euroland.  The cumulative 150 basis points of rate tightening since August 2011 represents just a fraction of the previous 1,375 basis points of ease done in 15 moves from March 2009 through February 2011.

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



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