15 October 2002

The Central Bank of Iceland lowers interest rates

The Board of Governors of the Central Bank of Iceland has decided to lower the interest rate in the Bank's repurchase transactions by 0.3 percentage points to 6.8%, effective at the next auction of repurchase contracts on October 22, 2002.
On September 18, 2002, the Central Bank announced a lowering of its interest rate by 0.5 percentage points. The decision to lower interest rates at that time was taken in view of rapidly declining inflation and an increasing evidence of growing slack in the economy. Furthermore, the Central Bank declared that if new data confirmed the existing trend of declining inflation towards the Bank's inflation target and growing slack in the economy, interest rates would be lowered further.
There are particularly three aspects of recent developments which confirm the Central Bank's previous assessment of the inflation outlook and the state of the economy. Firstly, the inflation forecast for the third quarter of the year was almost exactly on target, as was the forecast for the second quarter. Hence, the outlook for attaining the inflation target during the fourth quarter of 2002 has strengthened. Secondly, unemployment figures for September indicate increasing slack in the labour market, with the seasonally adjusted rate of registered unemployment rising to about 3%. Thirdly, the outlook for economic growth in 2003, according to recent forecasts, has deteriorated somewhat since the summer, provided that envisaged large investment projects will not significantly affect the outcome that year.
The Central Bank will publish a new inflation forecast and its assessment of economic prospects in its quarterly publication, Monetary Bulletin (Peningamál), on November 6, 2002. These will lay the foundation for the monetary policy decisions of the Bank in the coming months.


October 15, 2002