Statement of the Monetary Policy Committee 3 October 2018
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 4.25%.
According to preliminary national accounts figures, GDP growth in 2017 and H1/2018 was stronger than had been assumed in the August Monetary Bulletin. The positive output gap may therefore have been wider than previously projected. On the other hand, high-frequency indicators and surveys suggest that demand growth may subside more rapidly than previously assumed.
Inflation rose quarter-on-quarter in Q3/2018, in line with the August forecast. Inflation excluding housing has risen as well, and the difference between measures of inflation including and excluding housing has narrowed considerably. The year-on-year rise in house prices continues to ease, but this is offset by a sizeable increase in import prices in the recent term. This partly reflects the rapid rise in global oil prices. The króna has depreciated since the last MPC meeting, and exchange rate volatility increased in September, in part due to uncertainty about one of Iceland’s major airlines’ financing.
Survey measures of inflation expectations are unchanged since the last MPC meeting, whereas the breakeven inflation rate in the bond market has risen. Inflation expectations appear to be somewhat above the target by all measures. The MPC reiterates that it has both the will and the tools necessary to keep inflation at target over the long term. If inflation expectations continue to rise and remain persistently at a level above the target, it will call for a tighter monetary stance. Other decisions, particularly those relating to the labour market and fiscal policy, will then affect the sacrifice cost in terms of lower employment.
The near-term monetary stance will depend on the interaction between a narrower output gap, wage-setting decisions, and developments in inflation and inflation expectations.
3 October 2018