Iceland's central bank left its key interest rates steady on an improved outlook for inflation but added that a tighter monetary stance will still be needed due to growing inflationary pressures.
The Central Bank of Iceland, which has raised rates by 125 basis points this year, repeated its guidance from November that "how much and how quickly this monetary stance must be tightened will depend on future developments."
The central bank lowered its reserve requirement by 150 basis points to 2.5 percent from the Dec. 21 maintenance period to ease the impact on liquidity from the contributions paid by the estates of failed banks, and said it would lower it further to 2.0 percent in connection with planned auctions of offshore krona.
In September the reserve requirements were temporarily raised to 4 percent from 2 percent to strengthen the central bank's ability to manage liquidity in connection with the liberalization of capital controls and foreign currency purchases.
Iceland's consumer price inflation rate rose to less-than-expected 2.0 percent in November from 1.8 percent in October as the decline in oil and commodity prices and the rise in the krona offset domestic price rises, the bank said.
In its November monetary bulletin, the bank cut its forecast for third quarter 2015 inflation to 2.0 percent from 2.4 percent and fourth quarter 2015 inflation to 2.3 percent from 3.8 percent.
For 2015 the bank cut its forecast for inflation to average 1.7 percent from 2.2 percent and the 2016 forecast to 3.3 percent from 4.3 percent.
The Icelandic krona has been firmly slowing from mid-March but was quoted at 129.3 to the U.S. dollar today, down 1.5 percent since the start of this year.
The central bank left its 7-day deposit rate at 5.75 percent and the 7-day lending rate at 6.5 percent.
The Central Bank of Iceland issued the following statement: