02 October 2013

Statement of the Monetary Policy Committee

The Monetary Policy Committee (MPC) of the Central Bank of Iceland has decided to keep the Bank’s interest rates unchanged.
According to first estimates, GDP growth in the first half of 2013 measured just over 2%, somewhat stronger than was assumed in the Bank’s August forecast. The recovery of the labour market also continues. 

Inflation rose somewhat in the third quarter, in line with the Bank’s August forecast. The Bank’s intervention in the foreign exchange market has contributed to reduced exchange rate volatility. Inflation expectations have not fallen, however, which could be due to uncertainty about the effects of foreign debt deleveraging, the settlement of the failed banks’ estates, and capital account liberalisation on future exchange rate developments. Uncertainty about the upcoming round of wage negotiations is also a contributing factor.

In the Bank’s August forecast, it was assumed, based on past experience, that wage increases in the forthcoming wage settlements would be larger than is consistent with the inflation target. If wage increases are in line with the forecast, it will probably be necessary to raise the Bank’s nominal interest rates, other things being equal, particularly if the margin of spare capacity in the economy continues to narrow. If wages rise in excess of the forecast, it is even more likely that the Bank will raise interest rates. If wage increases are consistent with the inflation target, however, inflation will fall more quickly than is currently predicted and interest rates will be lower than would otherwise be necessary, other things being equal. 

Monetary policy must always take account of fiscal policy and other factors that affect aggregate demand. Future fiscal policy has been clarified to some extent with the presentation of the new fiscal budget proposal. In accordance with previous budget plans, the new budget proposal assumes that the surplus before financial income and expense (i.e., the primary surplus) will increase from this year’s level and that debt will decline as a share of GDP. It is important that an overall surplus be achieved as soon as possible so that the monetary and fiscal policy mix contributes to external balance of the economy, fosters overall economic stability, and delivers inflation close to target, at the lowest possible cost. 

The accommodative monetary stance has supported the economic recovery in the recent term. It is still the case that as spare capacity disappears from the economy, it is necessary that slack in monetary policy should disappear as well. The degree to which such normalisation takes place through changes in nominal Central Bank rates will depend on future inflation developments, which in turn will depend on wage developments and exchange rate movements.


 The rates of the Central Bank will be as follows:

No. 33/2013
2 October 2013

Overnight lending rate 7.00%
Seven-day collateralised lending rate 6.00%
Maximum rate on 28-day certificates of deposit (CDs) 5.75%
Current account 5.00%


Central Bank of Iceland interest rates 2 October 2013 (pdf)