Central Bank of Iceland Increases Policy Rate Skip to content

Central Bank of Iceland Increases Policy Rate

By Iceland Review

The Central Bank of Iceland decided yesterday to increase the policy rate by 0.45 percentage points to 13.75 percent. The reason is to fight the inflation which has been on the rise recently, and is currently higher than the bank expected.

A lower policy rate would not have been sufficient to fight the growing inflation, currently at 4.5 percent, or to reach the Central Bank’s inflation goal of 2.5 percent, as concluded in Peningamál, the Central Bank’s newsletter.

The Central Bank predicts that a higher policy rate will help to achieve an inflation of 2.5 percent within an acceptable timeframe, that is, the third quarter of 2009. By 2009, the Central Bank also expects the policy rate to have dropped to 4.0 percent.

The Central Bank’s decision of increasing the policy rate by 0.45 percent shows a determined will of restraint, as stated in Peningamál.

According to ruv.is, managing director of the Confederation of Icelandic Employers Vilhjálmur Egilsson has issued harsh criticism of the Central Bank’s move.

Egilsson said increasing the policy rate will only cause the currency of the Icelandic króna to rise and remain elevated for some time before it will come to an abrupt downfall while the inflation will continue its course.

The bank will make the last decision on the policy rate this year on December 20.

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