The MPC statement contained little in the way of major news, and the tone was similar to that in other recent statements. The MPC is of the view that the economic outlook is still consistent with the CBI’s May forecast, albeit characterised by two opposing forces: on the one hand, the prospect of a larger contraction in tourism than was projected in May, and on the other, stronger private consumption in Q1 and leading indicators of consumption, both of which imply that domestic demand is more resilient than previously assumed. The Committee is of the opinion that inflation has peaked and will ease in the second half of the year, although further depreciation of the ISK could derail that assumption.
When asked for his opinion on exchange rate developments and the CBI’s potential responses, Governor Már Guðmundsson said the bank’s policy still centred mainly on intervening in the foreign exchange market in response to offshore ISK-related outflows, excess volatility, or one-off flows stemming from specific large investments. In this context, he mentioned Marel’s share capital increase in late May and noted that perhaps, in retrospect, the CBI should have intervened in the market at the peak. In our opinion, that would have been wise, as FX market movements were due in part to internal stock trading by resident investors.
We also share the Governor’s opinion that the weakening of the ISK in recent months is not cause for particular concern as yet. In fact, the ISK has been impressively stable since mid-June. Furthermore, tourism-generated FX revenues will peak during the summer, and the next few weeks will see substantial inflows despite the year-on-year contraction in the sector.