Bank of Iceland Keeps 7-Day Lending Rate at 6.0%

August 21, 2013

A released statement from Iceland’s Monetary Policy Committee following today’s fifth policy meeting of 2013 made no changes to the final paragraph including the sentence on forward interest rate guidance.

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.

Inflation currently exceeds target but is projected to fall back in 2014.  The pace of deceleration hinges on wages and should be quicker than otherwise if pay awards do not exceed a rate consistent with the central bank’s inflation target. Provided that happens, officials are prepared to engineer a shallower rise of interest rates than otherwise, other things being equal.  Today’s statement revises projected GDP growth in 2014-15 down by a quarter to half a percentage point annually to slightly below 3% per annum.  Growth in 2013 will not quite reach 2%.  The statement also credits an exchange rate strategy implemented in May with stabilizing the krona.

Sedlabanki’s benchmark interest rate is only a third as high as the peak of 18% in late 2008 and prior to March 2009.  However, 175 basis points of tightening have already been completed through five measured 25-bp steps and one 50-bp increase.  The first of these actions occurred in August 2011, and the most recent was done last November.

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

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