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Iceland Inflation Accelerates to Reinforce Rate Tightening Plans

Iceland’s annual inflation rate accelerated this month, reinforcing the central bank’s plan to increase interest rates after the krona weakened.

Inflation was 6.4 percent in March, compared with 6.3 percent in the prior month, Reykjavik-based Statistics Iceland said today in a statement on its website. Consumer prices rose 1 percent on the month, the office said.

The central bank this month raised its benchmark rate by a quarter of a percentage point to 5 percent as it seeks to steer Iceland’s recovery and ensure a stable krona as capital controls are unwound. The bank anticipates further increases “in the near term,” it said in a March 21 statement.

The bank closed some loopholes for bondholders in its capital controls on March 13, which had threatened to weaken the currency. Sedlabanki, which targets annual price growth of 2.5 percent, last month raised its forecast for economic growth in 2012 to 2.5 percent from 2.3 percent previously.

The tightening of controls “reduces inflation and the inflationary expectations for the short term,” Hogni Haraldsson, an economist with IFS Consulting ehf, said in a note prior to today’s inflation data “For the long term, the markets’ hopes for capital controls’ abolishment and appreciation in the currency have dwindled, which will lead to higher inflation in the future.”

The central bank expects inflation to slow to 4.6 percent this year and to 3.2 percent by the end of 2013 and 2.6 percent by the end of 2014, it said last month.

To contact the reporter on this story: Omar Valdimarsson in Reykjavik at valdimarsson@bloomberg.net

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net

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