The Board of Governors of the Central Bank of Iceland has decided to lowerthe yield in the Bank's repurchase transactions with credit institutions by 0.3percentage points, to 8.5 percent, effective at the next auction of repurchasecontracts on June 25, 2002. Other interest rates of the Central Bank will alsobe lowered by 0.3 percentage points, effective June 21, excluding the interestrate on current account deposits of credit institutions in the Central Bank,which will remain unchanged.

The Central Bank lowered its interest rate in repurchase transactions by 0.5percentage points on May 21, 2002 with reference to the elimination ofuncertainty concerning the continuation of existing wage contracts and thatprospects had been strengthened that the inflation forecast published at thebeginning of May would be realized. It was also stated that provided thedeceleration of inflation would continue to be in line with the inflationforecast, other things being equal, further reductions were to be expected inthe policy rate of the Central Bank in coming months.

The change in the CPI at the beginning of June has further improved theprospects that the inflation forecast published at the beginning of May will berealized. The changes in the CPI in May and June were on the whole closely inline with the forecast. Furthermore, there are not many signs of a pass-throughof possible accumulated cost increases although it may be premature to maintainthat it will not happen to some extent. Relative stability in the exchange ratein recent weeks further underpins the decision to lower interest rates at thepresent time.

Despite this latest interest rate reduction, monetary restraint, reflected inhigh real interest rates, continues to be significant as is to be expectedfollowing an inflationary surge. In light of the contraction of domestic demand,other things being equal, prospects are for a further reduction in interestrates in coming months. The exact timing of further interest rate changes willbe determined by developments and a fresh assessment of the economic conditionsand prospects. The Central Bank will publish its next inflation forecast andupdate its assessment of economic developments and prospects at the beginning ofAugust.

Nr. 8/2002

June 19, 2002