Central Bank of Iceland press release: The Monetary Policy Committee (MPC) has voted to lower Central Bank interest rates by 0.5 percentage points. The deposit rate (current account rate) will be lowered to 7.5%. The maximum bid rate for 28-day certificates of deposit (CDs) will be 8.75%. The seven-day collateral lending rate will be 9% and the overnight lending rate 10.5%.
Supporting an interest rate cut is the appreciation of the króna in trade-weighted terms since the last MPC meeting, despite the absence of Central Bank intervention in the FX market. This development, in an external environment of elevated sovereign risk premia and continued uncertainty about Iceland’s medium-term access to global financial markets, reflects the effectiveness of the capital controls and more favourable current account developments.
Inflation picked up in February, after a decline in December and January, to 7.3% year-on-year, or 5.9% excluding the impact of higher consumption taxes. The pick-up in inflation was broadly anticipated and does not fundamentally change the conclusion of the January forecast. Inflation is assumed to rise further year-on-year in March due to unfavourable base effects, but underlying inflation is still expected to reach the target late this year.
Elevated CDS spreads and a negative rating outlook associated with uncertainty about Iceland’s access to global financial markets support a relatively cautious move, due to potential negative pressure on the króna going forward. The delay in resolving the dispute over compensation of depositors in foreign branches of Landsbanki has triggered a sovereign credit rating downgrade to non-investment grade by one of the rating agencies and continues to delay the Second Review of the IMF programme and the associated financing. Given the continued effectiveness of the capital controls, this is not expected to have a substantial immediate effect on the exchange rate. However, in the absence of multilateral and bilateral financing or full access to international capital markets on acceptable terms, removal of capital controls or sizeable interest rate cuts would be risky until this matter is resolved.
If the króna remains stable or appreciates, and if inflation develops as forecast, there should be scope for continued gradual monetary easing. However, as long as there is significant uncertainty about Iceland’s future access to international capital markets, the MPC will have limited room for manoeuvre. As always, the MPC stands ready to adjust the monetary stance as required to achieve its interim objective of exchange rate stability and ensure that inflation is close to target over the medium term.
[…] Iceland lowers interest rates […]
The krona is that tiny currency, strongly appreciated, when policy rate is cut!
If they persist in revaluing artificially, soon the Icelanders will be very rich men again!
Situation is worse for days and, they got, artificially, 20 kronur against the Euro! I understand: your People; when krona was devalued, 85 to 350 against Euro, also you did think: oh! my People! The Icelanders.
You got 20 Kronur against the Euro, and, inflation is not targeted in Iceland: Houston, we have a problem! ; ICB, you have a problem!
IT DOES NOT MATTER WHAT THEY DO OR NOT TO TRY TO KEEP ALIVE A DEAD CURRENCY. ICELAND’S MAIN PROBLEM IS HAVING A DEAD KRONA AS ITS NATIONAL CURRENCY. THE KRONA IS THE SIKNESS OF THE ICELANDIC ECONOMY. BANKERS NEW THAT AND THAT IS WHY THEY WANTED TO GET RID OF IT EVEN IF IT CAUSED THE RUIN OF THEIR COUNTRY.
SOON TWO YEARS OF MISERY, AND STILL COUNTING… AND THE IMF LOAN HASNT BEEN DELIVERED YET. WILL THAT HAPPEN THIS YEAR? AND IF… HOW MANY YEARS WILL BE NEEDED FOR ICELAND TO PAY BACK IMF AND NORDIC COUNTRIES LOANS, AND ALSO PAY ICESAVE?? 10 YEARS? 20? MAYBE MORE??
WHATEVER THEY DECIDE TO DO, ICELANDERS WILL HAVE TO ENDURE MORE POVERTY, CUTS IN HEALTH AND EDUCATION SYSTEM, AND HIGH LEVELS OF UNEMPLOYMENT FOR AT LEAST THE NEXT 10 YEARS… AND WHAT IS WORSE… SOME OF THE LOWEST SALARIES IN EUROPE. I LAUGH TIL MY STOMACH HURTS WHEN I SEE ICELANDERS THINKING ABOUT DEVELOPING NEW IDEAS FOR ECONOMY, NEW BUSINESS, AS IF THAT WAS GOING TO SAVE THE ECONOMY OF ICELAND. NO MATTER WHAT YOU DO, NO MATTER HOW MANY NATURAL RESOURCES YOU HAVE… YOU NEED A STRONG CURRENCY TO MAKE ALL THAT WORK, AND TO CASH THE BENEFITS OF ECONOMIC ACTIVITY. IT IS JUST A VERY FUNDAMENTAL THING IN TRADE AND ECONOMY. AND PROBABLY THE OLDEST AND MOST BASIC ELEMENT OF IT: CURRENCY, WICH IS A VALID METHOD OF PAYMENT. AN OBJECT (IN THIS CASE MONEY) THAT REPRESENTS THE VALUE OF SOMETHING.
AN ECONONY CAN SIMPLY NOT FUNCTION WITH AN OBSOLETE AND DEATH CURRENCY THAT HAS LOST ALL ITS VALUE FOR THE REST OF THE COUNTERPARTS. THIS MEANS THAT IF A CURRENCY IS NOT ACCEPTED AS A VALID “PAYMENT OBJECT”… TRADE AND COMMERCE IS NOT POSSIBLE.
I ONLY SEE ONE OPORTUNITY FOR ICELAND AND THAT IS SOMEHOW BEING ABLE TO CATCH UP WITH THE EURO. AND DROP THE ICELANDIC KRÓNA ONCE AND FOR ALL.
THE ICELANDIC KRÓNA IS A VERY HEAVY STONE THAT IS SINKING AND IS TAKING THE ECONOMY OF A WHOLE NATION WITH IT INTO THE DEEPEST OF THE ATLANTIC OCEAN.