The Monetary Policy Committee of the Central Bank of Iceland decided to raise the bank’s interest rate by 0.25 percentage points. The main interest rate of the bank, i.e. the interest on seven-day term deposits, will therefore be 1 percent.
There have been some tensions over the bank’s interest rate decision. Consequently, the Department of Economics of Landsbankinn predicted interest rates to remain unchanged, while Íslandsbanki Research forecasts an interest rate increase of 0.25%.
In the statement of the Monetary Policy Committee it was stated that the economic recovery in the second half of last year was stronger than previously thought.
“According to the new macroeconomic forecast of the Central Bank, published in the May Monetary Bulletin, over 3% economic growth is forecast this year and over 5% economic growth next year. The outlook improved as compared to the Bank’s previous forecast, with the most important indications of a greater recovery in domestic demand. Unemployment has fallen, although still high. Consequently, the economic stagnation appears to be less and it looks like it will end sooner than previously thought.
Supply disruptions caused by the COVID-19 epidemic have increased the cost of manufacturing and distributing products worldwide, and global oil and commodity prices have also risen sharply in recent times.
However, this increase may be temporary.
Inflation was therefore higher and more durable than previously forecasted, reaching 4.6% in April. On top of that, there are many other elements, such as the effect of last year’s koruna depreciation and strong increases in wages and house prices. Therefore, it is necessary to increase the Bank’s interest rates in order to ensure the consolidation of inflation expectations with the inflation target.
The Monetary Policy Committee will use the available tools to ensure inflation returns to the target within an acceptable time frame “– we read in the announcement.
Still today, Ásgeir Jónsson, President of the Central Bank and Chairman of the Monetary Policy Committee, together with Rannveig Sigurðardóttir, Deputy Director for Monetary Policy and Deputy Chairman, and Þórarinn G. Pétursson, Chief Economist of the Central Bank and Managing Director for Economics and Monetary Policy, will present the committee’s decision.
mmn / visir.is