Central Bank of Iceland

June 12, 2013

Interest rate normalization is not finished but has been in pause mode since a 25-basis point hike of the seven-day collateralized lending rate last November.  That was the sixth increase since August 2011, a sequence totaling 175 basis points from 4.25% to 6.0%, the present level.  Just prior to March 2009, the rate was three times higher than now at 18%.

The accommodative monetary stance has supported the economic recovery in the recent term. It is still the case that as spare capacity disappears from the economy, it is necessary that slack in monetary policy should disappear as well. The degree to which such normalization takes place through changes in nominal Central Bank rates will depend on future inflation developments, which in turn will depend on wage developments and exchange rate movements.

This remained the conclusion to a statement released after this month’s meeting of the Monetary Policy Committee.  The statement, like the one last month, observes weaker-than-assumed economic growth in the first quarter but downplays the likelihood that softer activity will be sustained.  The krona has been steady over the past month, and “inflation has declined in recent months and now measures 3.3%. Underlying inflation and inflation expectations have declined as well but remain above the Bank’s inflation target.”  Uncertain fiscal policy in the future will also impact the timing of monetary policy changes.  The next interest rate announcement is scheduled August 21.

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

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