Policy rate unchanged, as forecasted
MPC statement: no big news
In today’s statement, the Committee points out that inflation expectations have risen again after declining at the beginning of the year, possibly reflecting the expectation that upcoming wage settlements will not be in line with the inflation target.
The closing section of the statement is exactly the same as in the February statement: “If inflation remains below target and pay increases in upcoming wage settlements are consistent with the inflation target, conditions for further reductions in nominal interest rates could develop. Large pay increases and strong growth in demand could undermine the recently achieved price stability, however, and require that interest rates be raised again.” The forward guidance implied here is neutral, in our opinion, in that it gives no indication of whether the MPC considers it likelier that the policy rate will move in one direction rather than the other.
Year-2014 GDP growth in line with CBI forecast
The MPC points out that, according to newly published preliminary figures from Statistics Iceland (SI), last year’s GDP growth was in line with the CBI’s most recent macroeconomic forecast, published concurrent with the 4 February interest rate decision. The SI figures indicate that GDP growth was 1.9%, whereas the CBI had forecast it at 2.0%. The new SI figures confirm that the earlier numbers were underestimated. The CBI forecasts GDP growth at 4.2% in 2015 and 2.8% in 2016.
Our forecast of an unchanged policy rate in 2015 remains unchanged
The next interest rate decision date is 13 May. The interval between decisions is relatively long this time, and it is quite possible that wage agreements will have been finalised by then. As before, we expect the MPC to hold policy rate unchanged through this year. If the aforementioned wage settlement risk materialises, however, it can be assumed that the MPC will respond with a rate hike.
We still expect the MPC to respond to rising inflation, a growing output gap, and an increasingly accommodative monetary stance by raising the policy rate by 0.75 percentage points in 2016.