02 September 2002

The Central Bank of Iceland lowers interest rates

The Board of Governors of the Central Bank of Iceland has decided to lower the yield in the Bank's repurchase transactions with credit institutions by 0.3 percentage points to 7.6 percent, effective at the next auction of repurchase contracts on September 3, 2002. 

The Central Bank lowered its policy rate by 0.6 percentage points on August 1, 2002.  With the reduction which is now being announced, the Bank has lowered it's policy rate by a total of 2.5 percentage points from the beginning of April this year and by 3.8 percentage points since they were at their highest level in the early part of 2001.

In its quarterly Monetary Bulletin which was published on August 1, 2002, the Central Bank presented its analysis of economic and monetary conditions and prospects and published a new inflation forecast.  The introduction to the Bulletin explained among other things the decision of the Board of Governors to lower the policy rate by 0.6 percentage points from August 1, and stated the following. 'It will be reduced even further in the months to come if subsequent events confirm that the inflation target will be attained and demand develops along the lines currently foreseen.  If demand grows faster than is thought likely at the moment, however, the situation could naturally change.'

The 0.5 percentage fall in the consumer price index in August was larger than expected and larger than entailed in the inflation forecast of the bank published at the beginning of August.  On August 29, the Central Bank published its Economic Indicators for August on its website.  They show among other things that there are indications now that domestic demand is beginning to pick up again after a long period of contraction.  These indications are visible among other things in credit card turnover, imports and treasury revenue.  Even though the contraction may have levelled out, there is considerable slack in the economy and it is by no means evident that a considerable durable upswing has begun again.  Seasonally corrected unemployment is still growing and the debt burden of households and businesses will constrain their ability to increase their activity for a while still. 

The change in the consumer price index in August and the information contained in the Economic Indicators do little to change the overall picture drawn up in the August issue of the Monetary Bulletin.  The reduction in interest rates now conforms with the message of the introduction to the Monetary Bulletin referred to above.

September 2, 2002