Corrects first para
Iceland’s central bank kept its key rates unchanged on Wednesday, but lowered its reserve requirements, as the short-term inflation outlook improved since November.
The Monetary Policy Committee of the Central Bank of Iceland decided to leave the seven-day collateralized lending rate at 6.50 percent and the deposit rate at 5.75 percent.
Previously, the bank raised its rates by 25 basis points in November and by 50 basis points each in August and June.
The bank said the short-term inflation outlook has improved since the November forecast and a stronger krona and more favorable global price developments provided the scope to lift interest rates more slowly than was previously considered necessary.
Nonetheless, this does not change the fact that a tighter monetary stance will probably be required in the coming term, in view of growing domestic inflationary pressure, it said.
“How much and how quickly the monetary stance must be tightened will depend on future developments,” the bank said.
Jessica Hinds, a European economist at Capital Economics, said she still think that further interest rate rises will be needed in 2016. The central bank will not be able to ignore pressures for very long and will therefore have to raise rates in 2016, she added.
The bank lowered its reserve requirements to 2.5 percent from 4 percent. The bank plans to lower the reserve requirements back to 2 percent.
In September, the bank had decided to lift reserve requirements temporarily to 4 percent from 2 percent so as to strengthen the Central Bank’s liquidity management.
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