On February 10, 2003, the Central Bank of Iceland published the Februaryissue of Peningamál (Monetary Bulletin), including the Bank's quarterlyinflation forecast and a macro-economic forecast. This issue of the MonetaryBulletin also includes an assessment of the macro-economic impact of theforthcoming large scale investment projects in hydropower and aluminium onthe east coast of Iceland, in 2003-2007, and their implication for monetary andfiscal policy.
Inflation declined rapidly during 2002. The inflation target of 2½% wasreached last November for the first time since the adoption of the inflationtarget regime in March 2001. According to the Bank's forecast, price stabilitywill prevail for the next two years and inflation most likely stay below theinflation target.
GDP growth is expected to have been slightly negative in 2002. Growth isforecast to remain below the long term growth rate of potential outputthis year, at 1¾%, but to reach potential in 2004. The current accountbalance, which is estimated to have been positive in 2002, will be well withinsustainable limits in 2003 and 2004 despite imports of investment goods for thepower-intensive project. The construction activity of hydro-electric andaluminium plants will not peak until 2005-2006. Thus conditions for pricestability will remain favourable for the next couple of years.
On the basis of the forecast and analysis published in this issue of MonetaryBulletin, the Board of Governors of the Central Bank of Iceland decided to lowerthe yield in the Bank's repurchase agreements with credit institutions by 0.5percentage points, to 5.3 percent, effective at the next auction of repurchaseagreements on February 18, 2003.
The English translation of Peningamál, Monetary Bulletin, will appear on theBank's website, each chapter as soon as it becomes available. Attached is apreliminary English translation of the Bulletin's introductory chapter.
3/2003
February 10, 2003