Changed outlook calls for lower interest rates

We expect the Central Bank (CBI) Monetary Policy Committee (MPC) to announce a 25-point reduction in the CBI’s policy interest rate on 22 May, the next interest rate decision date. This would bring the CBI’s key rate — the rate on seven-day term deposits — back to 4.25%, where it was until Q4/2018.


Summary

  • We forecast a 25-point rate cut on 22 May

  • Policy rate will fall to 4.25%

  • A 50-point rate cut is not impossible

  • The inflation outlook has improved, and the breakeven rate in the market has fallen

  • The short-term economic outlook has worsened markedly

  • Further policy rate cuts are probable in coming months

We expect the Central Bank (CBI) Monetary Policy Committee (MPC) to announce a 25-point reduction in the CBI’s policy interest rate on 22 May, the next interest rate decision date. This would bring the CBI’s key rate — the rate on seven-day term deposits — back to 4.25%, where it was until Q4/2018. A larger rate cut next week is not beyond the realm of possibility, but we think it likelier that the MPC will choose to dish out a larger number of smaller rate cuts in the near future. We would be quite surprised if the MPC decided not to lower rates on Wednesday, as the monetary stance is now tighter than is warranted by fundamentals, in our view.

Policy rate forecast - May 2019

Author


Jón Bjarki Bentsson


Chief economist

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