Iceland key interest rate unchanged, growth forecasts lowered

SedlabankiIceland’s central bank has kept it key interest rate unchanged at six per cent while lowering its forecasts for growth. The country has now kept interest rates unchanged for six successive meetings since November, after they gradually crept up from 4.2 per cent in August 2011 in order to combat rising inflation.

The rate of inflation was at 4.8 per cent in February this year but has since dropped as the North Atlantic nation’s economy has slowed. It stabilised at 3.3 per cent during the second quarter of the year but climbed to 3.8 per cent in July.

The majority of mortgages in Iceland are linked to the inflation rate, and the new government won the election earlier in the year on that back of promises to reduce the debt burden homeowners are faced with. However, the newly-elected coalition has made little progress in turning the economy around to date.

Following the meeting, the central bank has lowered next year’s growth forecast from 3 per cent to 2.8 per cent, and from 3.5 per cent to 2.9 per cent for 2015. It also forecasts that this year’s growth will be 1.9 per cent and not 1.8 per cent as it had predicted previously.

The main reasons behind the decision to lower growth forecast were decreased investment in the industrial and energy sectors as well as falling consumer confidence due to the uncertainty surrounding economic policy.

The central bank’s statement said that the government plans to implement the promised household debt relief measures, which causes uncertainty among households, is likely to discourage them from making expensive purchases.