More on Iceland's economic recovery

This is truly amazing.  Iceland is in the process of emerging from one of the sharper depressions in her history.  Yet while she is still staggering to get to her feet, her central bank somehow believes that fighting off inflation is still a high priority—if not priority #1—EVEN when inflation is probably the last worry they have.  It sort of reinforces Paul Krugman's description of central bankers in action (see his last answer).  Of course, this is pure Institutional Analysis—central bankers will act like central bankers.

A glimpse of an economy post this crisis

Posted by Paul Murphy on Jun 13 10:38.

Iceland, of course. Kitchen-sinked and cleaned-up, the Icelandic central bank has just decided to push up rates by 25 basis points to combat signs of inflation amidst “robust” domestic demand.

Statement:

National accounts data for Q1/2012 are broadly in line with the Bank’s May forecast, which stated that GDP growth would continue to reduce the margin of spare capacity in the economy. The economic recovery is broadly based, and the growth in domestic demand is robust. Signs of recovery in the labour and real estate markets are steadily growing stronger.

Inflation subsided somewhat in May; however, the outlook is for it to remain above the Bank’s target for longer than is acceptable, particularly if the króna remains weak.

Uncertainty about the global economy has increased in recent weeks, not least because of the financial crisis in Europe. This causes additional uncertainty about the domestic economic and inflation outlook. In the near future, monetary policy may need to respond to developments that could significantly affect output growth and inflation in Iceland. In such circumstances, the MPC will aim, as before, to achieve the inflation target over the medium term while attempting to stabilise fluctuations in domestic output.

The accommodative monetary stance has supported the economic recovery in the recent term. Raising interest rates in May and again now, in June, has withdrawn some of that accommodation, as is appropriate in view of the recovery of the real economy and the deteriorating inflation outlook. As the recovery continues and spare capacity disappears, it is necessary that the monetary policy slack should disappear as well. The degree to which such normalisation takes place through higher nominal Central Bank rates will depend on future inflation developments.

Iceland’s new central bank rates:



The trick here? Sharp cuts in state spending, capital controls and a currency unit called the Krona..  more