Iceland's central bank left its key interest rates unchanged, including the seven-day deposit rate at 5.50 percent and the seven-day lending rate at 6.25 percent, but warned that it would have to raise rates further if inflation accelerates in the wake of wage settlements.
The Central Bank of Iceland, which has raised its rates by 100 basis points this year, said how much and when it would hike rates would depend on future developments, such as fiscal policy, while a strong krona and global price developments had provided scope to raise rates slower than previously considered necessary.
While holding rates steady today, the central bank raised its reserve requirements by 200 basis points to 4.0 percent as of Oct. 21 to "strengthen the Bank's liquidity management, in the wake of substantial foreign currency purchases" in connection with a wind-up of the estates of failed banks and the plan to release or tie up offshore krona.
Iceland's inflation rate remains below the bank's 2.5 percent target, partly due to the high exchange rate of the krona, helping improve the short-term outlook. In August inflation eased to 1.9 percent from July's 2.2 percent.
"As before, the outcome of wage settlements and somewhat elevated inflation expectations indicate that inflation will gain momentum in the near future," the bank said, adding this has been offset by falling global goods prices and nearly 4 percent appreciation of the krona since the last rate decision in August despite "sizable foreign currency purchases by the Central Bank."
In August, when the bank last raised its rate, it also raised its forecast for 2015 inflation to 2.2 percent from May's forecast of 1.9 percent, and the 2016 forecast to 4.3 percent and the 2017 forecast to 4.1 percent.
The Central Bank of Iceland issued the following statement: