{"id":77102,"date":"2015-08-19T09:13:11","date_gmt":"2015-08-19T13:13:11","guid":{"rendered":"http:\/\/countingpips.com\/?p=77102"},"modified":"2015-08-19T11:51:47","modified_gmt":"2015-08-19T15:51:47","slug":"iceland-raises-rate-50-bps-and-sees-further-rate-hike","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2015\/08\/iceland-raises-rate-50-bps-and-sees-further-rate-hike\/","title":{"rendered":"Iceland raises rate 50 bps and sees further rate hike"},"content":{"rendered":"
August 19, 2015<\/div>
\r\n<\/div><\/div>

By CentralBankNews.info<\/u><\/a>
\n    Iceland’s central bank raised its key interest rates by a further 50 basis points, as widely expected, and said it “will have to raise interest rates still further in order to bring inflation back to target” if inflation rises in the wake of wage settlements, as it expects.
    The Central Bank of Iceland raised its rate by 50 basis points in June in response to strong wage increases and warned that a “sizable rate increase will be necessary in August.”
    It has raised its key rates by 100 basis points this year compared to a cut of 75 points in 2014.
    In today’s statement the central bank said the size of the future rate hikes would depend on how much the large pay increases are passed on to prices and how much productivity grows, along with such factors as terms of trade, credit growth, real estate prices and how much other policy instruments are used to contain demand-side pressures.
    <\/span>All the central bank’s key rates were raised by 50 basis points so the seven-day deposit rate is 5.50 percent, the seven-day lending rate 6.25 percent and the overnight lending rate 7.25 percent.<\/span>
    In response to recent wage settlements, the central <\/span><\/span>bank<\/span> raised its forecast for 2015 consumer price <\/span><\/span>inflation<\/span> to 2.2 percent from May’s forecast of 1.9 percent, the 2016 forecast to 4.3 <\/span><\/span>percent from 3.0 percent and the 2017 forecast to 4.1 percent from a previous 3.2 percent.<\/span><\/span>
    “The inflation outlook has deteriorated markedly since the last forecast, owing to the recent wage settlements, inflation expectations have risen,” the central bank said.<\/span><\/span>
    Iceland’s inflation rate in July rose to 1.9 percent from June’s 1.5 percent, still below the bank’s target of 2.5 percent.<\/span><\/span>
    In its latest monitor bulletin, the central bank lowered its forecast for Gross Domestic Product growth this year to 4.2 percent from May’s forecast of 4.6 percent, while the 2016 forecast was trimmed to 3.0 percent from 3.4 percent and the 2017 forecast to 2.8 percent from 3.1 percent.<\/span><\/span>
   But the central bank still described economic growth as “robust” and a positive output gap will widen t<\/span><\/span>o 1.1 percent of potential output this year from zero in 2014, with growth driven by domestic demand, which is forecast to expand by 6.8 percent this year, 4.4 percent in 2016 and 2.8 percent in 2017.<\/span>
    Iceland’s GDP contracted by 1.5 percent in the first quarter of this year from the previous quarter for annual growth of 2.9 percent, down from 3.0 percent in the fourth quarter of 2014.<\/span>
<\/a><\/p>\n

     <\/span><\/span><\/span>
    The Central Bank of Iceland issued the following statement:<\/p>\n

“The Monetary Policy Committee (MPC) of the Central Bank of Iceland has decided to raise the Bank\u2019s interest rates by 0.5 percentage points. The Bank\u2019s key interest rate \u2013 the rate on seven-day term deposits \u2013 will therefore be 5.5%.<\/div>\n
According to the Bank\u2019s new forecast, GDP growth will be just over 4% this year and about 3% per year for the two years thereafter. Over the forecast period, growth will be about \u00bd a percentage point below the Bank\u2019s May forecast per year. It will be robust nevertheless, and a positive output gap will widen in the coming term, with GDP growth driven by domestic demand \u2013 especially private consumption \u2013 to a greater extent than in recent years. Investment will be weaker than previously forecast, however, and labour demand will grow more slowly.<\/div>\n
Inflation has risen in the recent term but is still below the Bank\u2019s inflation target, particularly if the housing component of the CPI is excluded. However, the inflation outlook has deteriorated markedly since the last forecast, owing to the recent wage settlements, and inflation expectations have risen. Inflation is forecast to rise to 4% early in 2016 and to hover in the 4-4\u00bd% range over the next two years before easing towards the target, as the forecast implies that the monetary stance will be tightened in the near future.<\/div>\n
Changes in the economic outlook since May are attributable primarily to the effects of large pay increases following the wage settlements and the monetary tightening that inevitably accompanies pay hikes of such size. The changes also stem from global factors, which have contributed to a more pronounced decline in import prices than previously expected, and improved terms of trade, which counteract the inflationary effects of the pay rises. Furthermore, the kr\u00f3na has appreciated slightly, in spite of substantial foreign currency purchases by the Central Bank.<\/div>\n
If inflation rises in the wake of the wage settlements, as is forecast, the MPC will have to raise interest rates still further in order to bring inflation back to target over the medium term. How much and how quickly will depend on future developments and on how the current uncertainty plays out, including the degree to which large pay increases are passed through to prices, on the one hand, and the degree to which they prompt rationalisation and productivity growth, on the other. Developments in terms of trade, credit growth, and real estate prices are important factors as well. In addition, the interest rate path will depend on whether other policy instruments are used to contain demand-side pressures in the coming term.<\/div>\n
 Overnight lending: 7.25%
Seven-day collateralised lending: 6.25%
Seven-day term deposits: 5.50%
Current account: 5.25%”<\/div>\n
    www.CentralBankNews.info<\/a><\/div>\n
<\/div>\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

By CentralBankNews.info     Iceland’s central bank raised its key interest rates by a further 50 basis points, as widely expected, and said it “will have to raise interest rates still further in order to bring inflation back to target” if inflation rises in the wake of wage settlements, as it expects.    The Central […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-77102","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/77102","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=77102"}],"version-history":[{"count":1,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/77102\/revisions"}],"predecessor-version":[{"id":77103,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/77102\/revisions\/77103"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=77102"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=77102"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=77102"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}