Icelandic Central Bank Rate Cut as Growth is Slowing

May 22, 2019

The Central Bank of Iceland unexpectedly cut its seven-day term deposit rate to 4.0% from 4.5%. This reduction constitutes a double-reversal of trend. Following cuts totaling 125 basis points from May 2017 to October 2017, the central bank rate had been raised by 25 basis points just six months ago amid robust domestic growth. Today’s statement of explanation for the easing so suddenly after an initial rate increase revises projected economic growth in 2019 to a contraction of 0.4% from a forecast made three months ago of positive 1.8% growth. As a result of this big revision, officials have scrapped the view of a widening positive output gap and now envisage a situation emerging of excess aggregate supply. The statement predicts inflation peaking soon at about 3.4% and then easing into target next year, and the observation is made that inflation expectations are already moderating.

Copyright 2019, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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