Iceland interest rates unchanged

The Central Bank of Iceland’s board of governors met last week to consider the country’s interest rate and announced that the current rate of 15.5 percent will remain.

According to reports by CEP News, the board published a statement regarding their decision in which they said the depreciation of the krona in early 2008 was the main motivating factor behind earlier interest rate increases.

“As could be expected, the fall in the exchange rate pressed inflation upwards in April, and in the months to come, inflation could rise still further than the Bank projected in its April forecast,” the statement noted.

“Ultimately, however, the effects of a narrowing output gap and declining demand will dominate, and inflationary pressures will subside.”

The board also discussed the importance of preventing rising inflation rates from leading to a wage/price spiral.

“A high policy rate and other measures taken by the Central Bank and other authorities – including increased issuance of Government securities – are intended to foster stability in the foreign exchange market, which is an important precondition for controlling inflation and inflation expectations,” the statement said.

The board recognised the importance of last week’s currency swap with the central banks of Sweden, Denmark and Norway; however felt that even EUR 1.5 billion was not enough to “cure all ills”.

The board of directors concluded their statement saying: “Few things are more important for the balance sheets of households and businesses than that disinflation begin and continue on a firm path.”