Statement of the Monetary Policy Committee 12 December 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 4.5%.
According to the recently published national accounts, GDP growth measured 5% for the first nine months of the year, slightly more than the Central Bank had assumed in its November forecast.
Inflation has risen over the course of the year, in line with the forecast, measuring 3.3% in November. The main driver of the increase was the steep rise in import prices in recent months, as the króna has depreciated by over 11% year-to-date.
This depreciation and concerns about upcoming wage settlements have shown in expectations of a further rise in inflation. The monetary stance as measured by the Central Bank’s real rate has therefore eased again. On the other hand, there are signs that the positive output gap will continue to narrow in the near term. In addition, the rise in inflation expectations since the last MPC meeting is still by and large limited to short-term expectations, and the depreciation of the króna has slowed.
It has recently been announced that there are plans to release the last of the offshore króna assets that were locked in by the capital controls in the aftermath of the financial crisis. The resolution of such a legacy problem should not be allowed to lower the exchange rate of the króna; therefore, the Central Bank will intervene in the foreign exchange market, in line with previous statements. In this context, the Bank will also take into consideration that there are signs that the recent currency depreciation has pushed the real exchange rate below its equilibrium value.
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.
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.
12 December 2018
CBI interest rates 12 December 2018