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Iceland Inflation Holds at 5.4% in June as Interest Rates Rise

Iceland’s annual inflation rate was unchanged this month after the island’s central bank raised interest rates.

Inflation was 5.4 percent in June, Reykjavik-based Statistics Iceland said today on its website. Consumer prices rose 0.5 percent in the month, the office said.

The central bank this month raised its benchmark rate by quarter of a percentage 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“Raising interest rates in May and again now, in June, has withdrawn some of that accommodation, as is appropriate in view of the recovery of the real economy and the deteriorating inflation outlook,” the central bank said in a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.”

The currency has slipped about 3 percent against the dollar this year and strengthened 0.8 percent against the euro. It plummeted as much as 80 percent in the offshore market against the single currency following the island’s economic collapse in 2008.

The government in March closed a loophole in the island’s capital controls it said had allowed short-term investors to speculate on the krona. Iceland’s $13 billion economy will expand 3.1 percent this year, the Organization for Economic Cooperation and Development said May 22.

“We anticipate that inflation will continue to subside in the near term, assuming, of course, that the krona doesn’t depreciate,” Ingolfur Bender, head of research at Islandsbanki hf, said in a note prior to the release. “Our forecast is based on the assumption that the krona will continue its seasonal fluctuation pattern but will appreciate overall in coming quarters. If it fluctuates in line with the conventional pattern, it will appreciate until the fall, with the impact making itself felt through the winter.”

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