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Iceland‘s Central Bank raises benchmark rate to cap inflation

23rd March | Category: News

Iceland’s Central Bank has raised interest rates for the third time in seven months, in order to contain inflation after the króna slipped. The seven-day collateralised lending rate was raised to 5.00% from 4.75%, the Bank said on its website on 21st of March. It its statement, the Bank said:

The economic outlook is broadly in line with the Central Bank’s February forecast. The króna is weaker than in February, however, and the short-term inflation outlook has deteriorated somewhat from the forecast prepared at that time. Further ahead, there is the risk that inflation will remain above the Bank’s inflation target for a longer period than projected unless the króna appreciates in coming month The extent to which closing the loopholes in the Foreign Exchange Act affects the exchange rate will emerge in the near future.

Moving forward it will be necessary to withdraw the current degree of monetary accommodation as the recovery progresses and the slack in the economy diminishes. The degree to which such normalization takes place through higher nominal Central Bank rates will depend on future inflation developments. In the absence of an improvement in the inflation outlook, a further increase in nominal interest rates will probably be required in the near term in order to bring the monetary policy stance, which is still quite accommodative, to an appropriate level.

The Bank is emerging from crisis mode as the Icelandic economy continues to lift itself from the 2008 meltdown. The country is attempting to lift capital controls that were put into place at the end of 2008 without allowing a sell-off of the Icelandic króna. The currency has slipped nearly 5% against the euro this year, more than double the Bank’s projected 2.5% target. Last week, Iceland’s Parliament closed a loophole in capital controls that had allowed short-term investors to speculate on the króna.

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