Iceland cuts main interest rate by 0.25 points


REYKJAVIK–Iceland’s central bank on Wednesday said it had once again cut its key interest rate, reducing it by 0.25 percentage points to 4.25 percent amid dwindling inflation and a favorable exchange rate.

The bank also lowered its other rates by 0.25 points, cutting its deposit rate to 3.25 percent, its maximum bid rate for 28-day certificates of deposit to 4.0 percent, and its overnight lending rate to 5.25 percent, it said in a statement. The central bank, or Sedlabanki, which cut its rates eight times last year — most recently in December when the key seven-day collateralized lending rate was slashed by 1.0 point — explained Wednesday’s decision with a continued drop in inflation and a stronger krona. “Favorable exchange rate developments over the past year, declining inflation expectations, and the slack in the economy continue to contribute to low and stable inflation,” the bank said in a statement. Iceland’s annual inflation rate stood at 1.8 percent in January — “significantly below the inflation target of 2.5 percent.” The bank referred to a forecast published Wednesday in its Monetary Bulletin predicting that Icelandic output would grow 2.8 percent this year and by three percent in 2012 and 2013. However, it said, “according to the bank’s forecast, (inflation) is expected to remain somewhat below the target until close to the end of the forecast period.” Since Iceland’s massive financial and economic meltdown in late 2008, when its main banks collapsed and its key interest rate soared as high as 18 percent, the central bank has progressively reduced borrowing costs in an attempt to get the country’s economy moving again. In January 2010, the key interest rate still stood at 10 percent. “With the prospect that inflation will remain near target and with interest rates at a historically low level, the direction of future policy moves becomes more uncertain,” the bank said Wednesday.

The prospect of removing the capital controls put in place to shore up the once tanking krona, also “creates uncertainty about short-term room for maneuver,” it said.