Central Bank of Iceland

August 19, 2015

An increase of the seven-day Icelandic collateralized lending rate on June 10 reversed the direction of monetary policy, and the Monetary Policy Committee today followed that action with a second 50-basis point hike to 6.25%, thus surpassing by 25 basis points the level that had prevailed from end-2012 until a cut in November 2014.  Officials released a new statement suggesting that even more monetary restraint is likely to follows and attributing their policy’s reversed stance to excessive recent wage settlements.  Although inflation currently lies below the 2.5% target, the outlook has been bumped up by expected wage pressure.

The inflation outlook has deteriorated markedly since the last forecast, owing to the recent wage settlements, and inflation expectations have risen. Inflation is forecast to rise to 4% early in 2016 and to hover in the 4-4½% range over the next two years before easing towards the target, as the forecast implies that the monetary stance will be tightened in the near future.  Changes in the economic outlook since May are attributable primarily to the effects of large pay increases following the wage settlements and the monetary tightening that inevitably accompanies pay hikes of such size.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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