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Iceland Central Bank Raises Rate

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Iceland’s central bank on Wednesday raised its main interest rate for the fifth time since May to combat rising inflation, though prices have risen less than previously feared, it said. online news

Central banks across the world have hiked their rates to combat soaring consumer prices, which rose after Covid restrictions were eased and surged even higher as Russia’s invasion of Ukraine sent food and energy prices through the roof.

Iceland’s central bank, Sedlabanki, said it lifted the rate by 0.25 percentage points to 6.0 percent following hikes in May, June, August and October.

Inflation picked up slightly in October, to 9.4 percent, but has fallen by 0.5 percentage points from its July 2022 peak. It is forecast to average around 9.4 percent in the fourth quarter, the bank said.

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It noted that the Icelandic currency, the krone, had depreciated since its last meeting in October.

In addition, “indicators imply that inflation expectations have become less firmly anchored to the target, and it could therefore take longer than it would otherwise to bring inflation back to target.”

Inflation has however risen less than was feared in August, “reflecting a more rapid shift in the housing market and larger-than-expected declines in petrol prices and airfares this autumn”, it added.

“The short-term inflation outlook has therefore improved, although prospects further ahead are broadly unchanged”.

The bank said it would “ensure that the monetary stance is tight enough to bring inflation back to target within an acceptable time frame”.

According to the bank’s new macroeconomic forecast, gross domestic product (GDP) growth is projected to measure 5.6 percent in 2022 and 2.8 percent in 2023, the latter figure up from the August forecast of 1.9 percent.


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Notes from APS Radio News

From the early part of March 2020 to April 15, 2022, the US Federal Reserve had been increasing its holdings by nearly $5 trillion dollars.

It did this each month of that period by buying billions of dollars of corporation and government bonds, in effect, infusing massive amounts of money into the economy.

And, as the FRED graph shows, it did so at rapid rate or at a high rate of velocity.

Economists say that when massive amoutns of fiat money are infused into the economy at high rates of velocity, the likelihood of noticeably higher rates of inflation is made greater.

A number of other central banks followed a similar policy.

For example, between late February 2020, even days before the media started fixating on the virus thingy, and March of this year, the European Central Bank embarked on its own version of monetary expansion.

During that period, the ECB increased its holdings by over 5 trillion euros.

The Bank of Japan also increased its holdings.

Between February of 2020 and earlier this year, it had increased its holding by a few hundred trillion Yen.

For a number of years, including the Bank of Japan, major central banks have kept their interest rates low.

For its part, the Bank of Japan kept its interest rates at negative rates, meaning that depositors had to pay banks to hold their money.

During and before the pandemic, major corporations had increased the number of mergers and acquisitions, as those entities were able to make their purchases using inexpensive money and higher stock valuations.

The other part of the equation was that of supply.

As a result of lockdowns, many small and medium-sized businesses were closed.

Shipping ports had lost workers, and truck drivers going to those ports had to wait in long lines, as a result.

In effect, well before Russia’s invasion of Ukraine, shortages of various goods and services developed.

The invasion and sanctions imposed have aggravated shortages of commodities like petroleum and grain.

And there have been instances of price gouging.

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