Statement of the Monetary Policy Committee 1 June 2016
The Monetary Policy Committee (MPC) of the Central Bank of Iceland has decided to keep the Bank’s interest rates unchanged. The Bank’s key interest rate – the rate on seven-day term deposits – will therefore remain 5.75%. The Committee has also decided to lower reserve requirements by 0.5 percentage points, in line with previous statements.
The economic outlook is broadly unchanged since the last interest rate decision. The outlook is still for rapid GDP growth, and there is increased tension in the labour market. In spite of large pay increases and a widening positive output gap, inflation has remained below target for over two years. In May, inflation measured 1.7%, about the same as it did a year ago. As before, this reflects the offsetting effects of domestic inflationary pressures versus the appreciation of the króna and unusually low global inflation. Other things being equal, the outlook is for inflation to remain below target well into this year but then rise when import prices stop falling, as was assumed in the Bank’s last forecast, published in Monetary Bulletin 2016/2 in May.
Global price developments and a stronger króna have provided the scope to raise interest rates more slowly than was previously considered necessary. By the same token, there are signs that monetary policy has anchored inflation expectations more securely than before and contributed to a more moderate rise in inflation than could have been expected in the wake of large pay increases. However, this does not change the fact that, according to the Bank’s forecast from early May, a tighter monetary stance will probably be needed in the coming term, in view of growing domestic inflationary pressures. How much and how quickly the monetary stance must be tightened will depend on future developments.
Press release no. 11/2016
1 June 2016