The forward guidance from the MPC was neutral in November, although the Committee signalled reasonably clearly that, other things being equal, no further rate cuts were in the cards for the present:
The Bank’s interest rates have been cut by 1.5 percentage points since the spring, and the impact of this has yet to come fully to the fore. Lower interest rates have supported demand, and based on the Bank’s forecast, the current interest rate level should suffice to ensure medium-term price stability and full capacity utilisation.
Given these statements and the short time since the last interest rate decision, plus the fact that recent statistics have been well in line with the CBI’s November forecast, we think major changes would have to occur in order for the MPC to change its tack and lower rates further at next week’s meeting. If the MPC did so, it would simply look a little odd, and such a decision would do nothing to enhance transparency and predictability of monetary policy.
We therefore expect that the arguments for unchanged interest rates will outweigh the arguments for a rate cut.
GDP growth set to be flat in 2019
Although the economy appears to be weathering the initial impact of the Q1/2019 export shocks reasonably well, statistics indicate a distinct cooling. According to Statistics Iceland’s (SI) national accounts figures for the first three quarters of the year, GDP growth measured 0.2% for the nine-month period. Domestic demand contracted by 0.9% year-on-year during the period, however, owing largely to a 23% contraction in business investment. Exports contracted by nearly 7% during the three-quarter period, yet the contraction in imports was even sharper, at nearly 10%, which is the main reason why the overall national accounts outcome was positive.