The Board of Governors of the Central Bank of Icelandhas decided to lower the interest rate in the Bank's repurchase transactions by0.3 percentage points to 6.8%, effective at the next auction of repurchasecontracts on October 22, 2002.

On September 18, 2002, the Central Bankannounced a lowering of its interest rate by 0.5 percentage points. The decisionto lower interest rates at that time was taken in view of rapidly declininginflation and an increasing evidence of growing slack in the economy.Furthermore, the Central Bank declared that if new data confirmed the existingtrend of declining inflation towards the Bank's inflation target and growingslack in the economy, interest rates would be lowered further.

There areparticularly three aspects of recent developments which confirm the CentralBank's previous assessment of the inflation outlook and the state of theeconomy. Firstly, the inflation forecast for the third quarter of the year wasalmost exactly on target, as was the forecast for the second quarter. Hence, theoutlook for attaining the inflation target during the fourth quarter of 2002 hasstrengthened. Secondly, unemployment figures for September indicate increasingslack in the labour market, with the seasonally adjusted rate of registeredunemployment rising to about 3%. Thirdly, the outlook for economic growth in2003, according to recent forecasts, has deteriorated somewhat since the summer,provided that envisaged large investment projects will not significantly affectthe outcome that year.

The Central Bank will publish a new inflation forecastand its assessment of economic prospects in its quarterly publication, MonetaryBulletin (Peningamál), on November 6, 2002. These will lay the foundation forthe monetary policy decisions of the Bank in the coming months.

14/2002

October 15, 2002