Icelandic Financial Market Digest 02. októberPublisher: Íslandsbanki Research • Resp.Editor: Ingólfur Bender
Our forecast: unchanged policy rate on 4 October
We expect the Central Bank (CBI) Monetary Policy Committee (MPC) to decide to hold the policy rate unchanged on 4 October, the next announcement date. Increased political uncertainty and the rise in the breakeven inflation rate in the bond market will more than offset disinflation, in our opinion. At the same time, there is a need for a relatively tight monetary stance, as the economy is buoyant at present, wages and house prices have risen swiftly, and there is considerable uncertainty about both the fiscal stance and the labour market in the coming term.
Even so, the doves in the Monetary Policy Committee (MPC) will still be able to find arguments in favour of a rate cut. Among the possible grounds for a reduction are inflation, which is more than a percentage point below the CBI’s 2.5% inflation target; inflation expectations, which have remained moderate; and the output gap, which will may well turn out narrower in the coming term than previously thought. One MPC member would have preferred to lower the policy rate in August, although the Committee ultimately decided unanimously to keep it unchanged. As a result, the possibility of a small rate cut late this year cannot be excluded if inflation remains markedly below the target.
The MPC’s forward guidance will presumably remain neutral, as it has been in the recent term, but the experience of recent quarters tells us that forward guidance has relatively limited informational value when the monetary stance is close to the level deemed appropriate by the Committee. That said, it is possible that the MPC will signal the possibility of a rate cut if inflation should decline further in the next few months.
Domestic financial market news and key statistics can be found on Keldan.is webpage.View market