The Monetary Policy Committee (MPC) of the Central Bank of Iceland has decided to raise the Bank’s interest rates by 0.25 percentage points.
National accounts data for Q1/2012 are broadly in line with the Bank’s May forecast, which stated that GDP growth would continue to reduce the margin of spare capacity in the economy. The economic recovery is broadly based, and the growth in domestic demand is robust. Signs of recovery in the labour and real estate markets are steadily growing stronger.
Inflation subsided somewhat in May; however, the outlook is for it to remain above the Bank’s target for longer than is acceptable, particularly if the króna remains weak.
Uncertainty about the global economy has increased in recent weeks, not least because of the financial crisis in Europe. This causes additional uncertainty about the domestic economic and inflation outlook. In the near future, monetary policy may need to respond to developments that could significantly affect output growth and inflation in Iceland. In such circumstances, the MPC will aim, as before, to achieve the inflation target over the medium term while attempting to stabilise fluctuations in domestic output.
The accommodative monetary stance has supported the economic recovery in the recent term. Raising interest rates in May and again now, in June, has withdrawn some of that accommodation, as is appropriate in view of the recovery of the real economy and the deteriorating inflation outlook. As the recovery continues and spare capacity disappears, it is necessary that the monetary policy slack should disappear as well. The degree to which such normalisation takes place through higher nominal Central Bank rates will depend on future inflation developments.
The rates of the Central Bank will be as follows:
No. 22/2012 13 June 2012
Central Bank interest rates 13 June 2012 (pdf)