Seðlabanki

Statement of the Monetary Policy Committee 19 March 2014

The Monetary Policy Committee (MPC) of the Central Bank of Iceland has decided to keep the Bank’s interest rates unchanged.

Inflation measured 2.1% in February and has subsided quite rapidly. Furthermore, newly published national accounts indicate that, over the past two years, wage costs per man-year rose considerably less than previous data had suggested. Furthermore, the outlook is that the results of the wage settlements concluded in late 2013 will apply to most of the labour market.

Because inflation is lower, the króna stronger, and wage increases smaller than was forecast in February, the medium-term inflation outlook has improved from previous estimates. Short-term inflation expectations have also declined in line with falling inflation, although long-term inflation expectations are still well above target.

The outlook for increased growth in domestic demand in coming quarters will, other things being equal, call for an increase in the Central Bank’s real rate. Measures that support monetary policy, including medium-term fiscal policy, could offset this, however. Furthermore, measures that strengthen the supply side of the economy could ease supply constraints, thereby weakening the inflationary effects of increased demand.

The monetary stance at any given time is determined by the inflation outlook. For the short term, the inflation outlook has improved, but as has been forecast previously, inflation is expected to rise again as domestic demand growth gains momentum and the slack in the economy gives way to a positive output gap. Whether there is scope for a nominal interest rate reduction will depend on developments in inflation and inflation expectations in coming months. Further ahead, the Bank’s real rate must be raised further if the above-described outlook materialises. The extent to which this takes place through nominal rate increases will depend, as before, on the future path of inflation.

No. 8/2014
19 March 2014

Central Bank of Iceland interest rates 19 March 2014