Iceland’s central bank on Wednesday kept its key policy interest rate unchanged at 9.25% and said uncertainty around ongoing earthquakes and a potential volcanic eruption outweighed the risk of soaring inflation.
Almost 4,000 people were evacuated this month from a coastal town as the ground shook, roads cracked and buildings suffered structural damage from thousands of quakes, and as scientists feared molten rock could imminently rise to the earth’s surface.
While raising rates in the last two years had a positive impact on prices, the inflation outlook nevertheless indicated that more tightening was required, the Bank of Iceland’s monetary policy committee (MPC) said in a statement.
“In spite of this, the MPC has decided to keep the key interest rate unchanged, owing to uncertainty about the economic impact of seismic activity on the Reykjanes peninsula,” it said.
Located between the Eurasian and the North American tectonic plates, Iceland is a perennial seismic hot spot, but direct volcanic threats to inhabited areas are still rare.
“There is significant uncertainty about the economic consequences of a possible volcanic eruption in the region and the impact on the government’s need for funding, which could have a considerable impact on treasury bond yields,” the central bank said.
Authorities are now preparing to build defence walls around a geothermal power plant that they hope will protect it by diverting lava flows.
“If a large eruption takes place near key infrastructure, the resulting damage could be substantial. The economy could also be strongly affected by a protracted eruption,” the central bank said.
“The impact on tourism, other exports, public sector performance, the exchange rate and inflation could be significant,” it added.
Iceland’s currency is now 6.4% weaker in trade-weighted terms than it was when the bank published its August monetary policy report, including a depreciation of 3.6% starting in November, when seismic activity began to intensify.
The central bank this month for the first time since January intervened in the foreign exchange market and sold currency for 2.8 billion Icelandic crowns ($20.02 million), it said. ($1 = 139.8900 Icelandic Crowns)
(Reuters)
