More Gradual Monetary Tightening Outlined for Iceland

November 4, 2015

The Central Bank of Iceland’s seven-day collateralized lending rate was hiked 25 basis points to 6.50%, half as much as two earlier tightenings engineered this year in June and August.  A statement released by the Monetary Policy Committee afterward revised projected growth upward but near-term inflation downward. 

The short-term inflation outlook is considerably better than the Bank projected in August, although the longer-term outlook is broadly unchanged. It is still expected that large pay increases will cause inflation to rise above the target as 2016 progresses and the effects of low global inflation taper off. Inflation will not return to target until 2018. The forecast is based on the assumption that the monetary stance will be tightened as the positive output gap widens and inflation rises. It also takes account of the fact that the fiscal budget proposal for 2016 entails some fiscal easing.

Rate tightening will continue, but it will not proceed as aggressively as envisaged a few months ago.  This year’s 125 basis points of tightening so has more than reversed 75 basis points of easing in the final two months of 2014.  Fifteen rate cuts from March 2009 through February 2011 slashed Iceland’s key central bank rate to 4.25% from 18.0%.  Between August 2011 and end-2012, the rate was increased back to 6.0%.

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



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