Seðlabanki

Statement of the MPC 12 December 2012

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

The most recent indicators suggest that economic developments have been in line with the Bank’s November forecast. According to preliminary figures from Statistics Iceland, output growth in the first three quarters of the year measured 2%, while in November the Central Bank forecast 2.1% growth for the period. The exchange rate of the króna has remained broadly stable since the last interest rate decision date, and inflation has developed in line with the forecast.

The accommodative monetary stance has supported the economic recovery in the recent term. The rise in interest rates since August 2011 and the decline in inflation have withdrawn a considerable amount of that accommodation.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 Central Bank rates will depend on future inflation developments, which in turn will depend to a large extent on exchange rate movements and wage-setting decisions. Whether the Bank’s nominal interest rates remain unchanged in the near term will depend, among other things, on whether the outcome of the forthcoming wage settlement review at the beginning of next year is consistent with inflation declining to the target.