REYKJAVIK: Iceland’s central bank on Wednesday shaved its key interest rate by a quarter of a point to 5.0 percent, citing the krona’s appreciation and political uncertainty following the country’s October elections.
Gross domestic product, business investment growth and export growth had all been stronger than projected for the first nine months of the year, the bank noted.
The rate of inflation, which was 2.1 percent in November, “has remained below target for nearly three years” despite large pay increases and higher household spending.
Favourable external conditions, the appreciation of the krona, and a relatively strict monetary stance compared to the rest of Europe has meanwhile slowed inflation, the bank said.
But the increase in household spending has been weaker than expected in recent months, and the fact that Iceland’s political parties have not been able to form a government since October 29 elections, have sparked uncertainty about the future budget, it noted.
The overall economic situation “gives the Monetary Policy Committee some scope to lower nominal interest rates now,” though it noted that “strong demand growth and the aforementioned uncertainties call for caution in interest rate setting.”
Iceland’s economy is one of the strongest in Europe, with the central bank forecasting growth of 5.0 percent in 2016 after ticking in at 4.2 percent in 2015.