Central Bank of Iceland Holds Policy Steady for Now

May 15, 2013

Officials at Sedlabanki kept the seven-day collateralized Icelandic lending rate at 6.0%, its level since a 25-basis point hike in mid-November 2012.  There were five increases of 25 bps and one of 50 basis points between August 2011 and November 2012, totaling 175 bps.  The current 6.0% rate remains at just a third of the pre-March 2009 peak of 18.0%.  A statement released by Sedlabanki’s Monetary Policy Committee speaks of a rate normalization process that still has some ways to go.  The policy stance at present is called “accommodative,” but paused for now.  Growth prospects are considered somewhat weaker than thought at the start of this year, and inflation has receded more quickly than anticipated, having fallen from an 8-month high of 4.8% in February to 3.3% by April.  A return to in-target inflation is likely to happen sooner than imagined previously.  But spare capacity is diminishing, so further central rate increases will become necessary eventually.  Regarding the timing of that process, “the degree to which such normalization takes place through higher nominal Central Bank rates will depend on future inflation developments, which in turn will depend on wage developments and exchange rate movements. In addition, monetary policy must at all times take account of fiscal policy and other factors that affect demand.”  The next rate announcement is set for June 12.

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



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