Iceland holds rates, awaits clearer economic situation

    Iceland's central bank maintained its key policy rates, including the seven-day lending rate at 5.25 percent, saying any change to nominal interest rates depends on demand and inflation, and currently the outlook for the labour market is highly uncertain while disinflation from lower fuel prices is merely temporary.
    The Central Bank of Iceland, which cut rates by 75 basis points in 2014, issued the following statement:

    "The Monetary Policy Committee (MPC) of the Central Bank of Iceland has decided to keep the Bank’s interest rates unchanged. The Bank’s key interest rate – the rate on seven-day term deposits – will therefore remain 4.5%.

According to recently published national accounts, GDP growth measured 1.9% in 2014, in line with what the Bank had projected in February. The new data confirm the MPC’s assessment, published in its last statement, that the preliminary GDP growth numbers for the first nine months of the year had been underestimated and do not therefore materially change the Committee’s assessment of recent GDP growth and the economic outlook.

Inflation has measured 0.8% in recent months and has been slightly negative if housing costs are excluded. Low global inflation and a stable króna contain inflation and offset the effects of considerable domestic wage increases. Inflation expectations had subsided to target at the beginning of the year. However, there are indications that they have risen again in recent weeks, possibly reflecting expectations that the results of the forthcoming wage settlements will not be in line with the inflation target.

The recent episode of low inflation is attributable in part to falling global fuel prices. Reductions in global fuel prices are beyond the scope of domestic monetary policy, however, and the disinflation resulting from them is temporary. The outlook for the labour market is also highly uncertain, and at the same time, there are signs of robust GDP growth in the near future. For this reason, the Committee considers it appropriate, as before, to wait until the economic situation becomes clearer, particularly as regards wage developments.

As always, developments in nominal interest rates depend on developments in demand and inflation. If inflation remains below target and pay increases in upcoming wage settlements are consistent with the inflation target, conditions for further reductions in nominal interest rates could develop. Large pay increases and strong growth in demand could undermine the recently achieved price stability, however, and require that interest rates be raised again. "

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