Central Bank of Iceland Eases Somewhat Unexpectedly

December 14, 2016

The seven-day deposit rate was cut to 5.0% from 5.25%. Although the rate had be reduced by 50 basis points in August, today’s action was somewhat surprising as growth has been strong. In a released statement, officials note that the strength of the krona influenced this second rate reduction of 2016.

Inflation measured 2.1% in November and has remained below target for nearly three years despite large pay increases and rapid demand growth. This is due largely to favorable external conditions and the appreciation of the króna but also to a tight monetary stance, which has anchored inflation expectations.

That being said, the statement tempers expectations of future cuts, noting that “uncertainties call for caution in interest rate setting.” These relate to fiscal policy, labor unrest, and upcoming capital account liberalization.

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



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