Wednesday, August 29, 2018

Iceland holds rate, to hike if inflation expectations rise

     Iceland's central bank left its key interest rate unchanged at 4.25 percent but said long-term inflation expectations had risen somewhat above its target and "if inflation expectations continue to rise and remain persistently at a level above the target, it will call for a tighter monetary stance."
     The Central Bank of Iceland (CBI) raised its forecast for consumer price inflation this year to 2.7 percent from a previous 2.6 percent, slightly above its target of 2.5 percent.
     In its August monetary bulletin, CBI also raised its inflation forecast for next year to 2.8 percent from May's forecast of 2.6 percent but lowered the 2020 forecast to 2.7 percent from 2.8 percent.
     Last year inflation in Iceland averaged 1.8 percent and in July this year inflation rose to 2.7 percent from 2.6 percent in June as petrol prices have risen and the exchange has weakened.
      The central bank's monetary policy committee said it "'has both the will and the tools necessary to keep inflation at target over the long term," adding that its policy stance in the near term will depend on the interaction between a narrower output gap, wage setting decisions and developments in inflation and inflation expectations.
      The CBI has kept its rate steady since a cut in October 2017 but warned in June that a tight monetary stance was needed in light of rapid growth in economic growth and wage pressures.
      Iceland's economy has benefitted from tourism in recent years and its Gross Domestic Product grew by an annual 5.4 percent in the first quarter of this year, up from 1.5 percent in the previous quarter while wages grew 3.5 percent in July from a year ago, up from 3.3 percent in June.
      The CBI raised its forecast for the economy to expand by 3.6 percent this year, up from 3.3 percent, and the same rate as in 2017, as strong trade outweighs slower growth in domestic demand.
      Economic growth is still expected to cool next year to 2.7 percent from a previous forecast of 3.0 percent as exports weaken along with domestic demand. In 2020 the economy is seen growing 3.0 percent, up from 2.7 percent forecast in May.
      The Icelandic krona, which soared against the U.S. dollar from 2015 to mid-2017, has eased this year though it has firmed a bit in the last week.
      The krona was trading at 107.09 to the dollar today, down 3.3 percent this year.

     
   
      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 4.25%.

According to the Bank’s new macroeconomic forecast, published in the August Monetary Bulletin, GDP growth will measure 3.6% this year, as it did in 2017. This is slightly stronger than the Bank had forecast in May. The improved outlook stems primarily from a more favourable contribution from net trade, which outweighs weaker growth in domestic demand. GDP growth is still expected to ease, with weaker export growth and a less rapid increase in domestic demand. Developments in house prices and indicators from the labour market point in the same direction.

Inflation measured 2.3% in Q2/2018 but had increased to 2.7% by July. Inflation excluding housing has risen as well, and the difference between measures of inflation including and excluding housing has narrowed considerably. The year-on-year rise in house prices continues to ease, but the opposing effects of the previous appreciation of the króna have diminished and petrol prices have risen. This trend will probably continue in the near term. The króna has depreciated slightly since the last MPC meeting, but the foreign exchange market has remained well balanced.

Indicators imply that long-term inflation expectations have risen somewhat above the target. The MPC reiterates that it has both the will and the tools necessary to keep inflation at target over the long term. If inflation expectations continue to rise and remain persistently at a level above the target, it will call for a tighter monetary stance. Other decisions, particularly those relating to the labour market and fiscal policy, will then affect the sacrifice cost in terms of lower employ- ment.
The near-term monetary stance will depend on the interaction between a narrower output gap, wage-setting decisions, and develop- ments in inflation and inflation expectations."

     www.CentralBankNews.info

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