Governor addresses Chamber of Commerce: Blazing a low-interest rate trail

Governor Ásgeir Jónsson reviewed monetary developments and prospects at the Chamber of Commerce monetary policy meeting, held at the Hilton Hotel this morning, Thursday 7 November. The theme of the meeting was “Blazing a low-interest rate trail”, and the Governor discussed Iceland’s low-interest rate environment and the long-term structural changes that have allowed for lower domestic interest rates.

“For Iceland, this is the first downward cycle since the World War II that has not been accompanied by a contraction in private consumption,” he said, pointing out that a downturn without a currency depreciation and inflation spike enables monetary policy to support demand without jeopardising price stability and eroding private sector conditions.

This week, the Monetary Policy Committee (MPC) cut the Central Bank’s key interest rate to an all-time low of 3%. “The Bank was able to cut interest rates and still assume that inflation would fall,” said Ásgeir. “This is something it has never been able to do before, and it stems from firmly anchored inflation expectations, which in turn stem in part from the Bank’s greater credibility. Inflation is not yet at target, but we are nevertheless lowering interest rates.” These changes are attributable to the Central Bank’s success in maintaining price stability, which has led to lower inflation expectations, as well as lowered the interest rate level required to maintain price stability. In addition, the Governor noted that the Bank’s rate cuts have been transmitted more effectively to the real economy. Bond interest, mortgage lending , and corporate lending rates have by and large tracked the Bank’s key rate.

Governor's slides can be accessed here:

Chamber of Commerce monetary policy meeting: Blazing a low-interest rate trail