No Change Made in Central Bank of Iceland Interest Rate

March 20, 2013

Six increases of the seven-day collateralized lending rate between August 2011 and November 2012 lifted such from 4.25% to 6.0%, but three subsequent meetings have come and gone without a further increase.  A statement released today after the third of those meetings

  • Notes that Icelandic GDP growth slowed more sharply between 2011 and 2012 than estimated previously.
  • Reiterates a likely outlook for a gradual economic recovery ahead.
  • Calls present inflation higher than assumed previously.
  • Credits central bank policy moves for stabilizing the krona, whose previous slide ran the risk of self-fulfilling expectations and a further depreciation.
  • Observes a diminishing output gap between potential GDP with fully employed resources and the actual level of GDP.

The statement concludes that more rate normalization will be eventually needed and that the timing of future increases will hinge on “future inflation developments.”  A better behaved krona has enabled the present “accommodative monetary policy” to be maintained, but officials warn that “if inflation declines more slowly than was previously forecast, it will be necessary to reduce the monetary slack sooner than would otherwise be required.”  Inflation prospects hinge in large part on the krona and wage awards, each of which is being monitored closely.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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