IMF Survey online: Interest rates are still high. Is there room for them to come down?
Flanagan: Iceland’s central bank began reducing interest rates in March, and has now cut them by a total of 600 basis points. With the central bank’s effective policy rate now set at 9 percent (the level of its deposit rate, where it conducts most of its transactions), rates are now similar to levels prevailing for large emerging markets. And Iceland has avoided entirely the sharp spikes in interest rates seen in the wake of crises during the late 1990s. We know that many in Iceland are eager to see interest rates fall further, but our advice is to be cautious. The benefit from further cuts must be weighed against the negative impact this would have on the exchange rate and inflation, which is hugely important for all those consumers and companies that have loans linked to the price index or denominated in a foreign currency. Given Iceland’s circumstances, we must be sure that the overall impact will be positive. In sum, to underpin more robust economic performance, it is key that the
