Iceland cuts rate another 25 bps due to demand pressure
Iceland’s central bank cut its benchmark interest rate by 25 basis points for the second consecutive month as “clear signs of demand pressures in the economy call for a tight monetary stance so as to ensure medium-term price stability.”
The Central Bank of Iceland (CBI) has now cut its seven-day deposit rate by 50 basis points this year following a similar cut in May and reiterated its guidance that its “monetary stance in the coming term will be determined by economic developments and actions taken in other policy spheres.”
The CBI added the real rate of interest since the last meeting of its monetary policy committee “entails a somewhat tighter stance than the Committee both had intended and considers sufficient to support price stability.”
A rise in the exchange rate of the Icelandic krona over the last two years along with a strong anchor for inflation expectations has allowed the central bank to reach its price stability target with a lower interest rate than otherwise would have been possible.
Iceland’s inflation rate eased to 1.7 percent in May from 1.9 percent in April as the krona has been appreciating steadily except for a weakening in the last two weeks. The CBI targets inflation of 2.50 percent.
Last month the central bank lowered its outlook for headline inflation this year to 1.7 percent from February’s forecast of 1.9 percent, the 2018 forecast to 2.2 percent from 2.5 percent but then raised its to 3.3 percent in 2019 from a previous 2.8 percent.
The krona was trading at 100.0 to the U.S. dollar today, down from 98.6 at the start of June but still up 13 percent since the start of this year.
“The outlook is for strong GDP growth in 2017, as in recent years,” the CBI said, adding the outlook had changed little since its last forecast, with growth still driven by tourism and private consumption while the government is expected to ease its fiscal stance.
In May the CBI’s outlook for economic growth was raised to 6.3 percent for this year, up from 5.3 percent previously forecast.
For 2018 the central bank expects growth of 3.5 percent, up from 3.1 percent, and for 2019 2.5 percent, up from 2.6 percent. The 2016 estimate was raised to 7.2 percent from 6.0 percent.
The Central Bank of Iceland issued the following statement:
Source: http://www.centralbanknews.info/2017/06/iceland-cuts-rate-another-25-bps-due-to.html
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