Iceland Keeps Rates Unchanged to Support Economic Recovery

Iceland’s central bank kept its benchmark rate unchanged for a second meeting to support a recovery as economic growth slows.

The seven-day collateral lending rate was held at 6 percent, Reykjavik-based Sedlabanki said today.

“Recent economic indicators suggest that output growth was weaker in 2012 than previously anticipated, and the outlook for 2013 is for more modest growth than was forecast in November,” the central bank said.

Iceland has raised rates six times since August 2011 to steer a recovery more than four years after the nation’s banking meltdown. The bank is seeking to prevent krona losses from fueling inflation as it struggles to unwind capital controls imposed in 2008. The krona has lost almost 17 percent against the euro since an Aug. 10 high, pushing consumer price growth to an annual 4.2 percent in January. The bank targets 2.5 percent inflation.

The bank today predicted that economic growth will slow to 2.1 percent this year, cutting its 2.9 percent forecast. It predicted inflation will slow to its target in 2015, from 3.8 percent this year, and forecast that the krona, on a trade-weighted basis, will be little changed over that period.

“The accommodative monetary stance has supported the economic recovery in the recent term,” the bank said. “The rise in interest rates in the past year and a half and the decline in inflation have withdrawn a considerable amount of that accommodation.”

The krona slid 0.2 percent to 171.85 per euro as of 9:33 a.m. in local time.

‘Taking Root’

Iceland, which completed a 33-month International Monetary Fund program in August 2011, is outgrowing much of Europe as it recovers from the deepest recession in six decades. The recovery is “taking root” and a fiscal consolidation is “broadly on track,” the IMF said in November. The economy was estimated to expand 2.6 percent last year and 2.3 percent this year, according to the IMF.

Restrictions are blocking as much as $8 billion in offshore krona assets from being sold, according to estimates by Arion Banki hf. The currency plunged 80 percent against the euro offshore when three of the country’s largest lenders collapsed under an $85 billion mountain of debt in October 2008.

The European Central Bank’s rate is at 0.75 percent, while the main rates in Norway and Sweden are at 1.5 percent and 1 percent, respectively.

Iceland last month prevailed in a case brought by the European Free Trade Area Surveillance Authority that it breached laws by refusing in 2008 to cover U.K. and Dutch deposits in failed Landsbanki Islands hf. Winning the case eased pressure on the country as it escaped damages that could have been as high as 335 billion kronur ($2.6 billion), or 20 percent of gross domestic product.

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