Bloomberg News

Iceland Inflation Slows After Krona Strength Damps Prices

August 29, 2012

Iceland’s annual inflation slowed this month as the strengthening krona helped damp price gains in the north Atlantic island.

The inflation rate fell to 4.1 percent in August from 4.6 percent the prior month, Reykjavik-based Statistics Iceland said today on its website. Consumer prices fell 0.2 percent in the month, the agency said.

The central bank this month kept its benchmark rate unchanged at 5.75 percent, after raising rates five times in the last 12 months. The bank, which targets 2.5 percent inflation, sees price growth averaging at 5.4 percent this year, 3.4 percent next year and 3 percent in 2014.

“The inflation outlook for the next two years has improved since the Monetary Policy Committee’s last meeting, although inflation is not expected to reach the bank’s inflation target until the end of the period,” Sedlabanki said on Aug. 22.

The currency climbed to more than a three-year high earlier this month, before paring gains following the central bank decision to shelve tightening plans. The krona has fallen about 2.4 percent since the Aug. 22 rate decision.

“In the short term, matters have certainly improved but the flip side is that the winter could turn out to be more challenging as the current krona exchange rate can’t be maintained, unless the central bank and the government can through craftiness prevent the krona from weakening.” Asdis Kristjansdottir, head of research at Arion Banki hf, said in a note to clients prior to the release.

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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