Statement of the Monetary Policy Committee 5 October 2016

Statement of the Monetary Policy Committee  5 October 2016

The Monetary Policy Committee (MPC) of the Central Bank of Iceland has decided to keep the Bank’s interest rates unchanged. The Bank’s key interest rate – the rate on seven-day term deposits – will therefore remain 5.25%.

As before, GDP growth is expected to be robust both this year and in 2017. The most recent indicators suggest even stronger growth than previously expected. In spite of large pay increases and rapid demand growth, inflation has remained below target for two-and-a-half years. Improved terms of trade, low global inflation, tight monetary policy, and the appreciation of the króna in spite of large foreign currency purchases by the Central Bank have offset the effects of wage increases on inflation.

In September, inflation rose significantly between months, to 1.8%. In part, this reflects the correction by Statistics Iceland of an error in its inflation measurements for the period from March through August. The Central Bank’s overprediction of inflation earlier in the year was therefore less than previously thought. However, the inflation outlook is unlikely to have changed from the forecast published by the Bank in August, as the króna has appreciated still further and inflation expectations remain close to target.

The likelihood of increased macroeconomic imbalances and the uncertainty associated with capital account liberalisation argue for caution in interest rate setting. The monetary stance in the coming term will therefore depend on economic developments and the success of the capital account liberalisation process.

No. 24/2016
5 October 2016