Iceland Foresees Rate Rises on Higher Inflation
Iceland’s central bank signaled it is ready to raise interest rates in order to cap inflation after consumer prices soared above the official target and the krona slid against the euro.
The seven-day collateral lending rate was left at 4.75 percent, Sedlabanki said today in Reykjavik. The bank also kept rates unchanged in December, after last year raising borrowing costs for the first time since Iceland’s banks failed in 2008.
“It will be necessary to withdraw the current degree of monetary accommodation as the recovery progresses and the slack in the economy disappears,” the central bank said. “Inflation is forecast to remain above the bank’s inflation target for somewhat longer than was projected in November.”
The bank, known as Sedlabanki, is trying to ease capital controls, in place since the end of 2008, without triggering a krona slump that risks fueling inflation. Policy makers in December halted a tightening cycle started last year to protect the economy from the fallout of the euro crisis, which threatens export-reliant nations such as Iceland.
Little Tougher
“The tone of the monetary policy committee has changed and is a little tougher,” said Ingolfur Bender, an economist with Islandsbanki hf, by phone. “They seem to be signaling rate increases later this year.”
Islandsbanki forecasts two increases this year, each by 25 basis points.
Inflation accelerated to 6.5 percent in January from 5.3 percent in December, the statistics office said. The bank targets 2.5 percent price growth.
Iceland, whose banks defaulted on $85 billion in 2008, completed a 33-month International Monetary Fund program in August. The Washington-based fund expects Iceland’s economy to grow faster than the average for the euro area this year as the region struggles to contain a debt crisis. Concern in the single-currency bloc has eased after the European Central Bank in December offered lenders unlimited three-year loans and leaders agreed on a fiscal pact and a permanent rescue fund.
Fastest Pace
Iceland’s economy grew at the fastest pace since the third quarter of 2007 in the three months through September, the statistics office said in December. Gross domestic product grew a quarterly 4.7 percent, the office said.
“The wage drift has been considerable, since a steep rise in unit labor costs has been the main driving force behind inflation recently,” Ingolfur Bender, an economist with Islandsbanki hf, said in a note before the announcement. “The inflation forecast for this year has consequently worsened for this reason and may result in a new and tighter stance.”
Iceland’s $12 billion economy will grow 2.5 percent this year, the IMF said in September. The euro area, by comparison, will grow 1.1 this year, the fund estimates.
Iceland’s currency has slipped 2 percent against the euro this year. The country started European Union accession talks in 2010 and the government has said it targets euro adoption as soon as possible.
To contact the reporter on this story: Omar R. Valdimarsson in Reykjavik valdimarsson@bloomberg.net.
To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net
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