Iceland Central Bank Keeps Key Rate Unchanged For Third Time
2011-06-15 13:05:24
Iceland's central bank left its key interest rate unchanged for the third time this year, but said tightening may be needed in the near term if inflation expectations rise.
The Sedlabanki held the seven-day collateralized lending rate at 4.25 percent. The central bank had cut the rate by 25 basis points in February.
The deposit rate was held at 3.25 percent, while the maximum bid rate for 28-day certificates of deposit at 4 percent. The overnight lending rate was kept at 5.25 percent.
Recent data do not materially change the overall outlook for growth and employment, the central bank said in a statement. "Given recent announcements, the outlook is for a more expansionary fiscal stance than previously forecast," the bank added.
The bank expects headline inflation, which rose for four straight months to reach 3.4 percent in May, to remain elevated through next year. Core inflation remains close to target, the bank noted.
The increase in inflation is seen mirroring a weak krona and higher commodity and oil prices. The bank has an inflation target of 2.5 percent.
"To the extent that the krona is broadly stable and these price increases are temporary, they are unlikely to have a lasting effect on inflation over the medium term," Sedlabanki said.
Expressing concern over wage inflation, the central bank pointed out that pay increases implied in recent wage agreements are not consistent with the inflation target over the medium term. The bank is worried that wage pressures arising from the traded good sector may lead to higher long-term inflation expectations amid economic recovery.
"To reduce the risk of such an outcome, tighter monetary policy may become warranted in the near term, with actual policy moves depending, as always, on developments and prospects," the central bank said.