The Board of Governors of the Central Bank of Iceland has decided to raise the Bank’s policy interest rate (repo rate) by 0.5 percentage points to 13.5%.

In the introduction to Monetary Bulletin published on July 6, it was stated that inflation way above target, a much poorer inflation outlook than in the Central Bank’s last forecast and mounting inflation expectations embodied a clear message that a considerable increase in the policy rate was still required, although it was uncertain how high the policy rate would need to go in order to bring inflation back to target. Furthermore, that in the absence of data indicating that inflation will come down faster than the outlook then implied, the Central Bank would continue to raise interest rates. At the same time as Monetary Bulletin was published, the Central Bank announced a rise of 0.75 percentage points in its policy rate. The Board of Governors also decided to assess the need for further measures in mid-August, i.e. to add one interest rate decision day to the preannounced schedule. Accordingly, the Board of Governors will make three interest rate decisions over the period from July to September, instead of twice as originally announced.

Although inflation in Q3/2006 will be lower than the Central Bank had forecast in Monetary Bulletin at the beginning of July, economic indicators in the interim have not altered the analysis of prospects and developments presented then. The Board of Governors therefore regards a further rise in the policy rate as unavoidable.

Looking ahead, the statement made in Monetary Bulletin in July and cited above remains valid. The Central Bank will closely monitor indications of changes in the economic outlook.

As previously announced, the Central Bank’s next interest rate decision will be made known on September 14. The next decision thereafter will be announced on Thursday, November 2, coinciding with the next edition of Monetary Bulletin.

No. 32/2006

August 16, 2006