Monetary policy outlook clouded by political uncertainty

We no longer expect the Central Bank of Iceland (CBI) to cut interest rates again this year. The Government’s collapse and prospect of a left-wing coalition taking power have increased the chance of a expansion. And if sustained the króna’s recent depreciation will add to inflationary pressure in the near term. However, since we expect the currency to appreciate again before long, we think that the CBI will wait until 2019 before tightening policy.