Bloomberg News

Iceland Keeps Rates Unchanged as Euro Crisis Weighs on Growth

February 14, 2012

Feb. 8 (Bloomberg) -- Iceland’s central bank kept interest rates unchanged for a second meeting as Europe’s debt crisis threatens to derail a recovery.

The seven-day collateral lending rate was left at 4.75 percent, Sedlabanki said today in Reykjavik. The bank also kept rates unchanged in December, after two increases last year.

The bank, known as Sedlabanki, is trying to ease capital controls, in place since the end of 2008, without triggering a krona slump that risks fueling inflation. Policy makers in December halted a tightening cycle started last year to protect the economy from the fallout of the euro crisis, which threatens export-reliant nations such as Iceland.

Iceland, whose banks defaulted on $85 billion in 2008, completed a 33-month International Monetary Fund program in August. The Washington-based fund expects Iceland’s economy to grow faster than the average for the euro area this year as the region struggles to contain a debt crisis. Concern in the single-currency bloc has eased after the European Central Bank in December offered lenders unlimited three-year loans and leaders agreed on a fiscal pact and a permanent rescue fund.

Iceland’s economy grew at the fastest pace since the third quarter of 2007 in the three months through September, the statistics office said in December. Gross domestic product grew a quarterly 4.7 percent, the office said.

Inflation accelerated to 6.5 percent in January from 5.3 percent in December, the statistics office said. The bank targets 2.5 percent price growth.

“The wage drift has been considerable, since a steep rise in unit labor costs has been the main driving force behind inflation recently,” Ingolfur Bender, an economist with Islandsbanki hf, said in a note before the announcement. “The inflation forecast for this year has consequently worsened for this reason and may result in a new and tighter stance.”

Iceland’s $12 billion economy will grow 2.5 percent this year, the IMF said in September. The euro area, by comparison, will grow 1.1 this year, the fund estimates.

Iceland’s currency has slipped 2 percent against the euro this year.

Iceland started European Union accession talks in 2010 and the government has said it targets euro adoption as soon as possible.

--Editors: Jonas Bergman, Tasneem Brogger

To contact the reporter on this story: Omar R. Valdimarsson in Reykjavik valdimarsson@bloomberg.net.

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net


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