Wednesday, October 6, 2021

Iceland raises rate 3rd time, inflation expectations rise

     Iceland's central bank raised its key interest rates for the third time this year, saying it remains concerned over the rise in inflation expectations despite a decline in underlying inflation. 
     The Central Bank of Iceland (CBI) raised its key interest rate by another 25 basis points to 1.50 percent, bringing this year's total increase to 75 basis points following earlier hikes in May and August.
     Iceland's headline inflation rate rose to 4.4 percent in September from 4.3 percent in the previous three months while core inflation eased to 4.2 percent from 4.3 percent.

    The Central Bank of Iceland issued the following statement:

"The Monetary Policy Committee (MPC) of the Central Bank of Iceland has decided to raise the Bank's interest rates by 0.25 percentage points. The Bank's key interest rate - the rate on seven-day term deposits - will therefore be 1.5%. 

According to preliminary national accounts figures, GDP growth was slightly weaker in H1 / 2021 than was forecast in the August Monetary Bulletin Growth in domestic demand was well in line with the Bank's forecast, however. Indicators imply a continued strong domestic economic recovery in Q3, and the GDP growth outlook for 2021 as a whole is broadly unchanged. 

Inflation rose to 4.4% in September.The contribution from the housing component continued to increase, and housing accounted for a large share of headline inflation in September. Underlying inflation continued to ease, however, although it remains significant. On the other hand, the impact of temporary supply-chain disruptions, which have pushed manufacturing and distribution costs upwards all over the world, could persist longer than previously anticipated. 

Although underlying inflation is declining, there is cause for concern in that inflation expectations appear to have begun rising again. It is too soon, however, to say whether they are becoming less firmly anchored to the inflation target.

The MPC will apply the tools at its disposal to ensure that inflation eases back to the target within an acceptable time frame."


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