Statement of the Monetary Policy Committee 4 October 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 4.25%.

The outlook is for GDP growth to be weaker this year than in 2016, in part because growth in tourism has eased. The rate of GDP growth will nevertheless be robust. There are signs that demand pressures in the economy have begun to subside.

Inflation has fallen somewhat in the past two months, measuring 1.4% in September. Measures of underlying inflation are even lower, and falling. The exchange rate of the króna is broadly unchanged since the MPC’s last meeting, after falling during the summer, and is 4.5% higher than it was a year ago. Measures of inflation expectations remain in line with the inflation target. In the past few months, fluctuations in the exchange rate have had relatively little impact on inflation and only transitory effects on inflation expectations.
Demand pressures in the economy call for a tight monetary stance so as to ensure medium-term price stability. Developments in inflation and inflation expectations and diminishing demand pressures indicate, however, that the Bank’s real rate is sufficient at present to keep inflation broadly at target. The monetary stance in the coming term will be determined by economic developments and actions taken in other policy spheres.

No. 24/2017
4 October 2017

Central Bank of Iceland interest rates and reserve requirements