Iceland unexpectedly cuts rates for first time since 2011
2014-11-05 11:51:03
Iceland’s central bank unexpectedly cut its benchmark interest rate for the first time since early 2011 after currency interventions strengthened the krona and brought down inflation.
The seven-day collateral lending rate was lowered to 5.75 percent from 6 percent, Reykjavik-based Sedlabanki said today in a statement. None of the three economists surveyed by Bloomberg predicted the decision. The bank last changed rates in November 2012, when it ended a cycle of six rate increases.
“Nominal interest rates have been unchanged for two years, but the bank’s real rate has risen more than previously anticipated, owing to a more rapid decline in inflation and inflation expectations,” the bank said. “The monetary stance has therefore tightened more than is warranted by the current business cycle position and the near-term outlook. Containing the rise in the real rate is therefore appropriate.”
Iceland, which is still seeking to unwind capital controls in place since its economic collapse in 2008, joins other central bank such as Sweden’s and the European Central Bank in lowering rates to boost inflation. Policy makers in Reykjavik started intervening in the currency market last year to support the exchange rate and bring down the cost of imported goods.
Timely Cut
The bank has said it will continue its exchange rate operations “as needed to mitigate” krona volatility.
The bank lowered its forecast for economic growth this year to 2.9 percent from 3.4 percent and for next year to 3.5 percent from 3.9 percent. Inflation is seen at 2.2 percent this year and 2.6 percent next year. The bank targets 2.5 percent.
“This was a timely cut,” said Ingolfur Bender, chief economist of Reykjavik-based Islandsbanki Hf, by telephone. “Inflation has for a long time been under the inflation target and the real exchange rate was raised too fast and too early when the economy turned a corner.”
The island is working on a plan to exit capital controls in place since its 2008 financial meltdown. The krona has climbed 3 percent this year against the euro after rallying 6.3 percent in 2013. Inflation was 1.9 in October, down from 6.5 percent in January 2012.