10 February 2003

The Central Bank of Iceland publishes Monetary Bulletin and lowers interest rates

On February 10, 2003, the Central Bank of Iceland published the February issue of Peningamál (Monetary Bulletin), including the Bank's quarterly inflation forecast and a macro-economic forecast. This issue of the Monetary Bulletin also includes an assessment of the macro-economic impact of the forthcoming  large scale investment projects in hydropower and aluminium on the east coast of Iceland, in 2003-2007, and their implication for monetary and fiscal policy.

Inflation declined rapidly during 2002. The inflation target of 2½% was reached last November for the first time since the adoption of the inflation target regime in March 2001. According to the Bank's forecast, price stability will prevail for the next two years and inflation most likely stay below the inflation target.

GDP growth is expected to have been slightly negative in 2002. Growth is forecast  to remain below the long term growth rate of potential output this year, at 1¾%, but to reach potential in 2004.  The current account balance, which is estimated to have been positive in 2002, will be well within sustainable limits in 2003 and 2004 despite imports of investment goods for the power-intensive project. The construction activity of hydro-electric and aluminium plants will not peak until 2005-2006. Thus conditions for price stability will remain favourable for the next couple of years.

On the basis of the forecast and analysis published in this issue of Monetary Bulletin, the Board of Governors of the Central Bank of Iceland decided to lower the yield in the Bank's repurchase agreements with credit institutions by 0.5 percentage points, to 5.3 percent, effective at the next auction of repurchase agreements on February 18, 2003.

The English translation of Peningamál, Monetary Bulletin, will appear on the Bank's website, each chapter as soon as it becomes available. Attached is a preliminary English translation of the Bulletin's introductory chapter.

Inflation forecast with the Bulletin's introductory chapter

February 10, 2003