14.06.2017

Statement of the Monetary Policy Committee 14 June 2017

The Monetary Policy Committee (MPC) of the Central Bank of Iceland has decided to lower the Bank’s interest rates by 0.25 percentage points. The Bank’s key interest rate – the rate on seven-day term deposits – will therefore be 4.5%.

The outlook is for strong GDP growth in 2017, as in recent years. That outlook has changed little from the Bank’s last forecast, and GDP growth in Q1 was broadly consistent with the forecast. As before, GDP growth is driven in particular by rapid growth in tourism and private consumption; furthermore, the outlook is for considerable fiscal easing this year.

Inflation is still broadly as it has been over the past half-year, but underlying inflation appears to have subsided in recent months. In addition, both short- and long-term inflation expectations have continued to fall since the MPC’s last meeting, and the Bank’s real rate has risen. As before, opposing forces affect the inflation outlook, with the appreciation of the króna and low global inflation offsetting domestic inflationary pressures. The gap between domestic price developments – housing costs in particular – and external factors has widened significantly in recent months.

Clear signs of demand pressures in the economy call for a tight monetary stance so as to ensure medium-term price stability. However, the increase in the Bank’s real rate since the last MPC meeting entails a somewhat tighter stance than the Committee both had intended and considers sufficient to support price stability.

A stronger anchor for inflation expectations at target and the appreciation of the króna have enabled the MPC to achieve its legally mandated price stability objective with a lower interest rate than would otherwise have been possible. The monetary stance in the coming term will be determined by economic developments and actions taken in other policy spheres.

Central Bank of Iceland interest rates and reserve requirements

 

No. 19/2017

14 June 2017

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