The Monetary Policy Committee (MPC) of the Central Bank of Iceland announced yesterday its decision to keep the bank’s key interest rates unchanged at 4.25 percent.
Central Bank governor Már Gudmundsson. Photo by Geir Ólafsson.
The deposit rate (current account rate) will remain 3.25 percent, the maximum bid rate for 28-day certificates of deposit (CDs) 4.0 percent, the seven-day collateralized lending rate 4.25 percent, and the overnight lending rate 5.25 percent, as reported on the bank’s website.
The inflation outlook has deteriorated since the last MPC meeting, at least in the near term, and real Central Bank rates have fallen. Recent data do not materially change the overall outlook for growth and employment. However, given recent announcements, the outlook is for a more expansionary fiscal stance than previously forecast.
Headline inflation has increased for four consecutive months, reaching 3.4 percent in May, and will likely remain elevated through next year. However, core inflation still remains close to target.
The increase in inflation reflects a weak króna and the recent rise in commodity and oil prices. To the extent that the króna is broadly stable and these price increases are temporary, they are unlikely to have a lasting effect on inflation over the medium term.
Given the current exchange rate, however, pay increases implied in recent wage agreements are not consistent with the inflation target over the medium term. As the recovery progresses, wage pressures stemming from the traded goods sector may therefore cause longer-term inflation expectations to drift upwards.
To reduce the risk of such an outcome, a tighter monetary policy may become warranted in the near term, with actual policy moves depending, as always, on developments and prospects.
The MPC stands ready to adjust the monetary stance as required to achieve its interim objective of exchange rate stability and ensure that inflation is close to target over the medium term.
According to visir.is, Central Bank governor Már Gudmundsson stated yesterday that the next steps towards lifting capital controls are currently under preparation, adding that the Icelandic state’s issuing of bonds last week is an indication that the capital controls can be abolished more quickly than earlier assumed.
Click here to read more about the last key interest rate decision and here to read more about capital controls.