Bank of Iceland Cuts Interest Rate

November 5, 2014

Iceland’s one-week central bank lending rate was changed today for the first time in two years.  A cut of 25 basis points to 5.75% reversed a similar-sized increase in November 2012 that culminated 175 basis points of tightening begun in August 2011.  The explanation in a released statement focused on lower inflation and indications of falling expected inflation.

The Central Bank’s nominal interest rates have been unchanged for two years, but the Bank’s real rate has risen more than previously anticipated, owing to a more rapid decline in inflation and inflation expectations. The monetary stance has therefore tightened more than is warranted by the current business cycle position and the near-term outlook. Containing the rise in the real rate is therefore appropriate.

The statement also alludes to a somewhat weaker growth outlook, a stable krona that at times has required intervention to prevent appreciation, a larger current account surplus and sub-target inflation for the past nine months.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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