Bank of Iceland

June 1, 2016

Icelandic monetary policy has been in a tightening cycle since an initial increase in the seven-day collateralized lending rate of 50 basis points in June 2015.  That move was followed by two 25-basis point hikes in August and November.  But officials managed to put off a fourth increase in the first half of 2016, which at the start of this year had seemed unlikely.  As noted in a released statement today,  krona appreciation depressed import prices, and global inflation has been “unusually low.”  These factors have countered the impact on Icelandic CPI inflation of rapid GDP growth, a rising and positive output gap, and large pay increases.  Also, “there are signs that monetary policy has anchored inflation expectations more securely than before and contributed to a more moderate rise in inflation than could have been expected in the wake of large pay increases.”  Having said that, the statement reaffirms the prior view that “a tighter monetary stance will probably be needed in the coming term, in view of growing domestic inflationary pressures.”

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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