Statement of the Monetary Policy Committee 3 October 2012

The Monetary Policy Committee (MPC) of the Central Bank of Iceland has decided to keep the Bank’s interest rates unchanged.

Recent economic indicators suggest a slower recovery of domestic demand than was forecast in August. On the other hand, risks stemming from the financial crisis in Europe have abated.

Inflation has been somewhat lower than was forecast in August. On the other hand, the króna is weaker than was assumed at that time, and the near-term exchange rate outlook is quite uncertain. On balance, the inflation outlook has not changed significantly since the MPC’s last meeting. Inflation expectations remain above the Bank’s inflation target, although they have declined slightly by some measures.

The accommodative monetary stance has supported the economic recovery in the recent term. The interest rate increases in May and June, together with reduced inflation, have withdrawn some of that accommodation. As spare capacity disappears from the economy, it is necessary that monetary policy slack should disappear as well. The degree to which such normalisation takes place through higher nominal Bank rates will depend on future inflation developments, but in the absence of changes in the outlook for inflation and the economic recovery, it is likely that further interest rate increases will be needed in the near future.

No. 36/2012
3 October 2012

 The rates of the Central Bank will be as follows:
 Overnight lending rate  6.75%
 Seven-day collateralised lending rate  5.75%
 Maximum rate on 28-day certificates of deposit (CDs)  5.50%
 Current account  4.75%