Iceland’s central bank left its benchmark rate on 7-day term deposits at 4.25 percent and reiterated its recent guidance that it expects the positive output gap to narrow but “a tight monetary stance is still needed in light of rapid demand growth and underlying pressures in the labour market.”
The Central Bank of Iceland (CBI), which has maintained its rate since a cut in October 2017, said economic growth in the first quarter of this year was slightly higher than expected but overall developments were largely in line with its May projections and growth is still expected to ease this year on weaker exports and less rapid rise in domestic demand.
Iceland’s Gross Domestic Product expanded by an annual 5.4 percent in the first quarter of this year, up from 1.5 percent in the fourth quarter of last year.
In May the CBI raised its GDP growth forecast for this year to 3.3 percent from a previous 3.2 percent, and down from 3.6 percent in 2017. For 2019 the CBI forecast 3.0 percent growth.
Inflation eased to 2.0 percent in May from 2.3 percent in April as the past rise in house prices continues to ease and the impact of past rises in the krona’s exchange rate have diminished, trends the CBI expect to continue in the near term.
“On the whole, inflation expectations appear consistent with the target,” said CBI, which targets inflation of 2.5 percent.
In May the CBI forecast consumer price inflation this year of 2.6 percent, up from 1.8 percent last year, and 2.6 percent in 2019.
The Central Bank of Iceland issued the following statement:
Iceland keeps rate steady, still sees need for tight stance