19 June 2002

The Central Bank of Iceland lowers interest rates

The Board of Governors of the Central Bank of Iceland has decided to lower the yield in the Bank's repurchase transactions with credit institutions by 0.3 percentage points, to 8.5 percent, effective at the next auction of repurchase contracts on June 25, 2002. Other interest rates of the Central Bank will also be lowered by 0.3 percentage points, effective June 21, excluding the interest rate on current account deposits of credit institutions in the Central Bank, which will remain unchanged.

The Central Bank lowered its interest rate in repurchase transactions by 0.5 percentage points on May 21, 2002 with reference to the elimination of uncertainty concerning the continuation of existing wage contracts and that prospects had been strengthened that the inflation forecast published at the beginning of May would be realized. It was also stated that provided the deceleration of inflation would continue to be in line with the inflation forecast, other things being equal, further reductions were to be expected in the policy rate of the Central Bank in coming months.

The change in the CPI at the beginning of June has further improved the prospects that the inflation forecast published at the beginning of May will be realized. The changes in the CPI in May and June were on the whole closely in line with the forecast. Furthermore, there are not many signs of a pass-through of possible accumulated cost increases although it may be premature to maintain that it will not happen to some extent. Relative stability in the exchange rate in recent weeks further underpins the decision to lower interest rates at the present time.

Despite this latest interest rate reduction, monetary restraint, reflected in high real interest rates, continues to be significant as is to be expected following an inflationary surge. In light of the contraction of domestic demand, other things being equal, prospects are for a further reduction in interest rates in coming months. The exact timing of further interest rate changes will be determined by developments and a fresh assessment of the economic conditions and prospects. The Central Bank will publish its next inflation forecast and update its assessment of economic developments and prospects at the beginning of August.


Nr. 8/2002
June 19, 2002