Iceland cuts interest rates to keep inflation at target

Iceland's central bank, despite the positive growth and wage developments, has operated a cut of 50 basis points, to 5.25%; the institute's move is justified by inflation which remains at very low levels and the appreciation of the koruna in comparison to other currencies. Last year the bank had proceeded with a rise in the refinancing rate to 7 days for three times.

The central bank, in a note, said "It will edge upwards when import prices stop declining and the effects of the currency appreciation subside,”. “Inflation will rise more slowly than previously forecast, however, and will not be as high as was previously projected. If the exchange rate continues to rise, and other things being equal, inflation will be lower than is provided for in the baseline forecast.”

The Icelandic krona has strengthened by more than 8 per cent over the last five to six months. “Today’s news indicates that the Icelandic economy is on track to be normalized,” Chief Analysts Jakob Christensen from Danske Bank said.

The likelihood of increased macroeconomic imbalances and the uncertainty associated with capital controls argue for caution in interest rate setting, the central bank said. “Whether interest rates will be lowered further or need to be raised again will depend on economic developments and on the success of the capital account liberalisation process,” it wrote.

This year, GDP is expected to grow by 4.9%, and continued in 2017 with robust growth.