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 7.6 percent, effective at the next auction of repurchasecontracts on September 3, 2002. 

The Central Bank lowered its policy rate by 0.6 percentage points on August1, 2002.  With the reduction which is now being announced, the Bank haslowered it's policy rate by a total of 2.5 percentage points from the beginningof April this year and by 3.8 percentage points since they were at their highestlevel in the early part of 2001.

In its quarterly Monetary Bulletin which was published on August 1, 2002, theCentral Bank presented its analysis of economic and monetary conditions andprospects and published a new inflation forecast.  The introduction to theBulletin explained among other things the decision of the Board of Governors tolower the policy rate by 0.6 percentage points from August 1, and stated thefollowing. 'It will be reduced even further in the months to come if subsequentevents confirm that the inflation target will be attained and demand developsalong the lines currently foreseen.  If demand grows faster than is thoughtlikely at the moment, however, the situation could naturally change.'

The 0.5 percentage fall in the consumer price index in August was larger thanexpected and larger than entailed in the inflation forecast of the bankpublished at the beginning of August.  On August 29, the Central Bankpublished its Economic Indicators for August on its website.  They showamong other things that there are indications now that domestic demand isbeginning to pick up again after a long period of contraction.  Theseindications are visible among other things in credit card turnover, imports andtreasury revenue.  Even though the contraction may have levelled out, thereis considerable slack in the economy and it is by no means evident that aconsiderable durable upswing has begun again.  Seasonally correctedunemployment is still growing and the debt burden of households and businesseswill constrain their ability to increase their activity for a while still. 

The change in the consumer price index in August and the informationcontained in the Economic Indicators do little to change the overall picturedrawn up in the August issue of the Monetary Bulletin.  The reduction ininterest rates now conforms with the message of the introduction to the MonetaryBulletin referred to above.

Nr.11/2002

September 2, 2002