Our forecast: unchanged policy rate on 1 June

We forecast that the Central Bank (CBI) Monetary Policy Committee (MPC) will decide to keep the bank’s policy rate unchanged on 1 June, its next decision date. In the rationale for its decision, we expect the MPC to mention two things in particular: inflation has remained below target for over two years despite large pay increases and a widening output gap, and the outlook is for inflation to remain below target well into this year. 

The last interest rate decision was announced just a few weeks ago, on 11 May. At that time, the MPC decided to keep the policy rate unchanged, in line with our forecast and others. According to the minutes from the May meeting, the interest rate decision was supported unanimously by Committee members, none of whom saw any reason to change rates at that time. Since then, little or nothing has happened that should give MPC members cause to change the policy rate. 

Forward guidance unchanged

The forward guidance in the MPC’s last statement is largely unchanged from the statement accompanying the previous decision. According to the statement, “[g]lobal price developments and a stronger króna have provided the scope to raise interest rates more slowly than had previously been considered necessary. […] However, this does not change the fact that, according to the Bank’s forecast, a tighter monetary stance will probably be needed in the coming term, in view of growing domestic inflationary pressures. How much and how quickly the monetary stance must be tightened will depend on future developments.” We expect the MPC to repeat this forward guidance in next Wednesday’s statement.