OECD advise Iceland to tighten monetary policy

kronurThe Organization for Economic Cooperation and Development (OECD) has said that Iceland should raise interest rates to slow the rate of inflation, and introduce debt-relief measures for financially-stricken households.

The OECD, which published an economic survey of Iceland on Wednesday, said the country should keep tightening its monetary policy as economic activity recovers, in an attempt to reduce the inflation rate to the set target. It noted that further debt reductions should target financially-stressed households.

The current inflation rate in Iceland is higher that the central bank’s target of 2.5 per cent, largely due to the weak króna. In May, annual inflation had dropped to 3.3 per cent from 5.4 per cent in the same month last year. The North Atlantic country imposed capital restrictions following the collapse of its major banks in 2008.

The Icelandic government tried to prevent a króna sell-off after the currency fell by as much as 80 per cent versus the euro on the offshore market. However, the controls have been have been unable to stop a slide of roughly eight per cent in the króna versus the single currency following a high in January.

Icelandic banks have written off household debt equal to around 12 per cent of GDP since the economy crashed. By the end of 2012, the lenders had forgiven 212.2bn króna (USD 1.7bn), according to figures published by the Icelandic Financial Services Association, which estimates that this year will see a further 35.3bn króna written off.

Comments are closed.