Central Bank of Iceland

November 16, 2016

Officials at Sedlabanki had cut the 7-day repo rate by 50 basis points in August. This was a trend reversal following three increases totaling 125 bps between June and November of 2015. Many analysts were expecting a second rate reduction this month and inflation has been under target for almost three years in Iceland and remains so at 1.8% now. But the key central bank interest rate was instead left unchanged at 5.25%, a stance that officials in a statement concede is tight and even though expected inflation remains well-anchored and growth has been somewhat stronger than anticipated in the last forecast released in August. The statement argues for caution, nonetheless:

The MPC’s decision to keep interest rates unchanged is taken upon consideration of the Bank’s current forecast and the Committee’s risk assessment. This includes, in particular, the uncertainty about the fiscal stance, which has eased in the past two years and remains uncertain because it is unclear at present what the next Government’s economic policy will be. In addition, there is unrest in the labor market, not least in the wake of the recent ruling providing for pay increases for elected officials. Moreover, there is continued uncertainty about the impact of capital account liberalization, although the process has been smooth thus far. Added to this is uncertainty about the global economic outlook.

Although inflation expectations appear to be more firmly anchored to target and the monetary stance has tightened to some extent through the appreciation of the króna, strong demand growth and the aforementioned uncertainties call for caution in interest rate setting.

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



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