Iceland Unexpectedly Cuts Policy Rate By 25 Bps
(RTTNews) - Iceland's central bank lowered its key interest rate unexpectedly as the economy is expected to recover more slowly than previously anticipated due to worsening prospects for exports. The Monetary Policy Committee of the Central Bank of Iceland, led by Governor Ásgeir Jónsson, unanimously decided to cut the rate on seven-day term deposits by 25 basis points to 7.25 percent.
Markets expected the bank to hold the rate at 7.50 percent. The bank had last reduced the rate by a quarter-point in May.
Policymakers observed that inflation has remained close to 4 percent for nearly a year. Underlying inflation also developed in broadly the same manner.
The economic growth is projected to slow more than previously estimated due to the series of export sector shocks and the turmoil in the domestic mortgage market following the recent Supreme Court decision.
Consequently, the bank expects inflation to subside more rapidly than previously assumed. Pay rises are still sizeable, and inflation expectations continue to measure above target, the bank said.
The committee considered it appropriate to offset this tightening by lowering interest rates. However, policymakers said further decisions to lower interest rates will depend on clear evidence that inflation is falling back to the Bank's 2.5 percent inflation target.
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