Iceland Inflation Slows to 4.6% in July as Interest Rates Rise

Iceland’s annual inflation rate slowed this month, easing pressure on the island’s central bank to raise interest rates further.

Inflation slowed to 4.6 percent in July from 5.4 percent in the prior month, Reykjavik-based Statistics Iceland said today on its website. Consumer prices fell 0.7 percent on the month, the agency said.

The central bank last month raised its benchmark rate by a quarter point to 5.75 percent, the fifth increase since August to steer Iceland’s recovery and ensure a stable krona as capital controls are unwound. The bank targets 2.5 percent inflation.

“Raising interest rates in May and again now, in June, has withdrawn some of that accommodation, as is appropriate in view of the recovery of the real economy and the deteriorating inflation outlook,” the central bank said in a June 13 statement. “As the recovery continues and spare capacity disappears, it is necessary that the monetary policy slack should disappear as well.”

Inflation is easing as the krona has risen after the government in March closed a loophole that had allowed investors to circumvent capital controls to speculate on the currency. A stronger krona makes imported goods cheaper.

The currency has gained about 5.3 percent against the euro this year and 0.2 percent against the dollar. It plummeted as much as 80 percent in the offshore market against the single currency following the island’s economic collapse in 2008.

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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