Iceland cuts several key rates

Iceland’s central bank has cut its benchmark seven-day collateral lending rate one percentage point to 10 per cent, and lowered its deposit rate (current account rate) by 0.5 per cent to 8.5 per cent. The overnight lending rate will be lowered by 1.5 percentage points to 11.5 per cent and the Central Bank will continue to issue 28-day certificates of deposit with a maximum bid rate of 9.75 per cent, which is 0.5 percentage points lower than before.

Inflation continued to decline in November. The MPC’s view is that “the risk of second-round effects on inflation is limited and that inflation is driven primarily by exchange rate movements; thus the pace of disinflation will depend mostly on near-term exchange rate movements. If the króna remains stable or appreciates, and if inflation continues to fall as forecast, there should be scope for continued gradual monetary easing.”

Iceland’s recession deepened in the third quarter, as the economy shrank 5.7 per cent from the previous quarter. The economy is forecast to contract a further 2 per cent in 2010. An IMF mission is currently in Iceland to review the economy, following a $2.1bn loan; the mission should finish on December 14.