Statement of the Monetary Policy Committee 11 June 2014The Monetary Policy Committee (MPC) of the Central Bank of Iceland has decided to keep the Bank’s interest rates unchanged.
Newly published national accounts figures from Statistics Iceland indicate that domestic demand growth was somewhat stronger in Q1 than had been forecast in the May issue of Monetary Bulletin. Output growth appears to have been markedly weaker than was forecast in May, however, due primarily to strong services imports. It should be noted, though, that it is difficult to interpret quarterly output growth figures, particularly in the first quarter of any given year, in part because of wide fluctuations in export inventories.
Inflation has been close to target in recent months and, according to the Bank’s May forecast, is expected to remain near target until next year, when it is forecast to rise as a positive output gap emerges. Inflation expectations one to two years ahead have declined in the recent term, in line with falling inflation, although long-term inflation expectations are still somewhat above target.
The Bank’s foreign exchange intervention has contributed to greater exchange rate stability over the past twelve-month period. In addition, the Bank has been a net purchaser of foreign currency in recent months, and the season generally associated with strong foreign currency inflows lies ahead. The Bank has therefore decided to resume regular foreign currency purchases. The amount purchased will be re-evaluated in the autumn, or earlier if circumstances warrant it. As before, the Bank will intervene in the foreign exchange market as needed to mitigate exchange rate volatility.
Because of the decline in inflation and inflation expectations, the Bank's real rate has risen markedly year-to-date. As a result, the slack in the monetary policy stance has probably disappeared. The level of the Bank’s neutral real rate is uncertain, but increased growth in domestic demand in the near term will probably require further increases in the Bank’s real interest rate, other things being equal. Whether this requires a change in the Bank’s nominal interest rates in the near future will depend on developments in inflation and inflation expectations.