08 December 2010

Statement of the Central Bank of Iceland Monetary Policy Committee: Central Bank interest rates lowered

The Monetary Policy Committee (MPC) of the Central Bank of Iceland has decided to lower the Bank’s interest rates. The deposit rate (current account rate) is lowered by 0.5 percentage points, to 3.5%, and the maximum bid rate for 28-day certificates of deposit (CDs) and the seven-day collateralised rate are lowered by 1.0 percentage point each, to 4.25% and 4.5% respectively. Finally, the overnight lending rate is lowered by 1.5 percentage points, to 5.5%.

With this decision, the Bank’s interest rate corridor is narrowed by 1.0 percentage point, to 2.0 percentage points, with the aim of reducing the volatility of short-term market rates and moving the overnight interbank rate closer to the centre of the corridor. Hence, the overall monetary stance is eased by somewhat less than the change in the centre of the corridor.

Inflation continued to subside in November, after a marked decline since March of this year. The CPI rose 2.6% year-on-year in November, or 1.8% excluding consumption tax effects. The inflation target of 2½% has therefore been achieved. Services price inflation has contributed most to headline inflation over the past twelve months, with public services prices rising particularly sharply. The appreciation of the króna, declining inflation expectations, and the slack in the economy continue to contribute to low and stable inflation.

National accounts data released since the last decision suggest a somewhat weaker economy than was assumed in the November Monetary Bulletin, although it should be kept in mind that early releases of national accounts data are often subject to major revisions. Recovery seems to have begun in Q3/2010, in line with the November forecast, although it seems somewhat weaker than was projected then. Inflation has been slightly lower than was implied in the November forecast, but as before, the outlook is for it to fall temporarily below the target in 2011.

Since the MPC’s November meeting, the króna has remained broadly unchanged in trade-weighted terms but has appreciated by 1½% against the euro. As expected, the Central Bank’s regular purchases of foreign currency, which commenced on 31 August, appear not to have had any marked effect on the króna. The capital controls, developments in terms of trade and other factors affecting the current account balance, and the monetary policy stance relative to trading partner countries all continue to support the exchange rate.

The Monetary Policy Committee considers that, if the króna remains stable or appreciates and inflation subsides as forecast, there may yet be some scope for further monetary easing. However, the prospect of removing the capital controls creates uncertainty about short-term room for manoeuvre. The MPC stands ready to adjust the monetary stance as required to achieve its interim objective of exchange rate stability and ensure that inflation is close to target over the medium term.


No. 35/2010
8 December 2010