Iceland Cuts Key Rate

Iceland’s central bank lowered its key interest rate by another quarter point on Wednesday. The Monetary Policy Committee of the Central Bank of Iceland decided to cut the rate on seven-day term deposits to 4.50% from 4.75%. Previously, the rate was reduced by 25 basis points in May.

The bank reiterated that the monetary stance in the coming term will be determined by economic developments and actions taken in other policy spheres, RTTNews reported.

The bank noted that the economic growth was driven by rapid growth in tourism and private consumption. Furthermore, the bank said the outlook is for considerable fiscal easing this year.

Further, the bank observed that underlying inflation appears to have subsided in recent months. Moreover, both short-term and long-term inflation expectations continued to fall since the last monetary policy meeting.

As seen before, opposing forces affect the inflation outlook, with the appreciation of the krona and low global inflation offsetting domestic inflationary pressures.

The bank said clear signs of demand pressures call for a tight monetary policy stance so as to ensure medium-term price stability. “However, the increase in the bank’s real rate since the last MPC meeting entails a somewhat tighter stance than the committee both had intended and considers sufficient to support price stability,” the bank said.

Average inflation hit 1.7% in May–below the central bank’s target of 2.5%. The bank added that inflation expectations had also fallen since its last meeting. “Opposing forces affect the inflation outlook, with the appreciation of the krona and low global inflation offsetting domestic inflationary pressures”, said the central bank.