The Central Bank of Iceland (CBI), which raised its rate by 125 basis points last year, said domestic inflationary pressures and imported global deflation were still offsetting each other and even if inflation looks to remain below the target, the outlook for import prices is uncertain.
Iceland's inflation rate rose to 2.2 percent in February from 2.1 percent in January, below the CBI's target of 2.5 percent.
In its February bulletin, the central bank forecast average consumer price inflation of 2.3 percent this year, up from 1.6 percent in 2015 as the margin of spare capacity evaporated. For 2017 the central bank forecasts inflation of 4.1 percent and for 2018 inflation of 3.4 percent.
After losing about half its value during the global financial crises, Iceland's krona has appreciated in the last 12 months. The krona was trading at 126.7 to the U.S. dollar today, up 2.4 percent since the start of this year.
Iceland's economy grew by an estimated 4.0 percent in 2015, in line with the central bank's February estimate of 4.1 percent, and data this year suggest that the outlook is broadly unchanged and Gross Domestic Product growth will be robust.
The CBI has forecast GDP growth of 4.2 percent this year with private consumption rising by 5.3 percent, up from 4.9 percent in 2015.
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%.
According to Statistics Iceland estimates, GDP growth measured 4% in 2015, well in line with the Central Bank’s February forecast. Furthermore, indicators year-to-date suggest that the outlook for 2016 is broadly unchanged and that GDP growth will be robust in the coming term.
Inflation measured 2.2% in February and has risen by just over 1 percentage point in the past year. As before, domestic inflationary pressures and imported global deflation tend to offset one another. Inflation looks set to remain below the target well into this year, but the outlook is uncertain, including for import prices.
Global price developments and a stronger króna 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 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."