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Inflation exceeds tolerance limits

The Consumer Price Index rose 1.52 per cent month to month, and the annual rate of inflation is now 4.8 per cent, up from 3.7 per cent in August.

The Central Bank of Iceland targets inflation at 2.5 per cent, and the upper tolerance limit is 4.0 per cent. As the tolerance limits have been exceeded, the Central Bank must now explain in writing to the government how it aims to bring inflation down to 2.5 per cent.

All three of Iceland’s largest banks, Íslandsbanki, KB-banki and Landsbanki, discussed the new inflation readings in their daily newsletters yesterday. All three predict that the Central Bank will respond by raising interest rates by 0.5 per cent from 9.5 to 10.0 per cent before the end of the month.

Yesterday and this morning, the Icelandic króna has appreciated against a trade weighted basket of foreign currencies, and the exchange rate index ISV has jumped by more than 1 per cent since the close of trading Friday.

According to the website of Vidskiptabladid, Dr. Vilhjálmur Egilsson, an economist and former MP who serves as the permanent secretary of the Ministry of Fisheries, said this morning at a conference hosted by the Icelandic Chamber of Commerce that the new inflation readings provoked “shivering and disappointment”. He remarked that the Wage Inflation Index had been increasing by 6-7 per cent all year long, and that the government’s receipts of the social insurance payroll tax had gone up by 12 per cent this year, indicating that “something significant” was happening in the labor market.

Last week, the current foreign minister and former prime minister Davíd Oddsson, chairman of the Independence Party, was appointed governor and chairman of the board of governors of the Central Bank effective from October 20, 2005. Davíd has published several stories, poems and plays. According to the Icelandic Broadcasting Service, RÚV, at a news conference announcing his appointment Davíd remarked that this change of jobs would give him more time to write.

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