Iceland Central Bank Hikes Interest Rate 25bps to 4.50%

Iceland's Sedlabanki raised its seven-day collateral lending rate by 25 basis points to 4.50% from 4.25%.  The Bank also increased the deposit rate by 25 basis points to 3.50% and overnight lending rate to 5.50%.  The Bank said: "The interest rate increase is in accordance with recent MPC statements and reflects the fact that the inflation outlook for the coming two years has deteriorated still further since the Committee's last meeting," and noted "It is necessary to act now to contain inflation and reduce potential pressure on the krona".

At its June meeting the Sedlabanki also held the 7-day collateral lending rate unchanged at 4.25%.  Iceland reported headline inflation of 5% in July, up from 4.2% in June, 3.4% in May, and 2.3% in March; inflation had previously been forecast to peak just above 3.0% around the middle of this year, meanwhile the Bank's inflation target is 2.5%.  On inflation Sedlabanki said: "Developments in recent months have increased the risk that higher inflation expectations and a weak currency will cause inflation to become entrenched, particularly once economic recovery gains pace".

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