Meginmál

The Central Bank of Iceland lowers interest rates

The Central Bank of Iceland lowers interest rates

NOTE: This article is from 18. September 2002 and is therefore more than 5 years old.

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 0.5percentage points to 7.1 percent, effective at the next auction of repurchasecontracts on September 24, 2002.

When the Central Bank of Iceland published its inflation forecast andassessment of the economic situation and prospects on August 1, it lowered theinterest rate in repurchase transactions by 0.6 percentage points. That decisionwas motivated by a rapidly declining rate of inflation, growing economic slackand increased prospects that the inflation target of the Bank would be achievedbefore the end of the year. Furthermore, the Bank indicated that it would lowerits interest rates further in the period ahead if developments substantiatedthese prospects. A significant fall in the consumer price index in August andindications that the recovery of domestic demand was slow and well below whatwas needed to prevent further economic slack prompted the Central Bank to lowerits policy rate by 0.3 percentage points on September 1.

The rise in the consumer price index in September was at the upper end of therange of market expectations. Nevertheless, price developments in the last twomonths conform fully to the inflation forecast of the Central Bank from August1. Moreover, new figures indicate a growing slack in the labour market. Thereare also indications that economic growth in the coming year will be slower thanforecast by the National Economic Institute in June of this year such that theoutput gap would grow further. The reasons for this are that global economicprospects have deteriorated and that it is becoming unlikely that domesticbusiness investment will grow in 2003 on the scale entailed in the forecast ofThe National Economic Institute in June. However, that could change if adecision is taken on a new power intensive manufacturing project and relatedinvestment. 

This is the background to the Central Bank'sdecision to lower its policy rate now. The Bank will lower its policy ratefurther if developments in the coming weeks confirm even more firmly the rapiddecline in the rate of inflation towards the inflation target of the Bank and agrowing slack in the economy.

12/2002

September 18, 2002