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:
"The Monetary Policy Committee (MPC) of the Central Bank of Iceland has decided to keep the Bank’s interest rates unchanged. The Bank’s key interest rate – the rate on seven-day term deposits – will therefore remain 5.75%. The Committee has also decided to lower reserve requirements by 1.5 percentage points.
According to newly published preliminary figures from Statistics Iceland, year-on-year GDP growth over the first three quarters of 2015 measured 4.5%, which is broadly in line with the Bank’s November forecast. Furthermore, the labour market continues to recover strongly.
The short-term inflation outlook has improved since the November forecast. Inflation measured 2% in November and has risen less rapidly in the recent term than had been projected, as the decline in global oil and commodity prices and the appreciation of the króna have offset domestic price increases.
A stronger króna and more favourable global price developments have provided the scope to raise interest rates more slowly than was previously considered necessary. However, this does not change the fact that, according to the Bank’s November forecast, a tighter monetary stance will probably be needed in the coming term, in view of growing domestic inflationary pressures. How much and how quickly the monetary stance must be tightened will depend on future developments.
At its September meeting, the MPC decided to raise reserve requirements temporarily from 2% to 4% so as to strengthen the Central Bank’s liquidity management in connection with its foreign currency purchases and the liberalisation of the capital controls. The Committee has now decided to lower reserve requirements from 4% to 2.5% as of the next reserve maintenance period, which begins on 21 December, so as to mitigate the liquidity effect of the stability contributions paid by the failed banks’ estates. Other things being equal, the MPC plans to lower the reserve requirements back to 2% in connection with the planned auction of offshore kronur."
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