Abstract
This statement provides information that has become available since the staff report was issued to the Executive Board on May 14, 2021. The thrust of the staff appraisal remains unchanged.
This statement provides information that has become available since the staff report was issued to the Executive Board on May 14, 2021. The thrust of the staff appraisal remains unchanged.
1. The Central Bank of Iceland (CBI) raised the policy rate. The CBI increased its GDP growth forecast for 2021 from 2.5 percent to 3.1 percent, closer to staff’s projection of 3.7 percent but with a smaller and more rapidly closing output gap (by late 2022). The inflation rate accelerated to 4.6 percent in April—above the CBI’s notification band—and one-year-ahead inflation expectations rose to 3.1 percent in the May survey—0.6 percentage points above the inflation target. In view of these developments, the CBI raised the policy rate by 25 basis points to 1 percent aiming to keep inflation expectations anchored to the target.
2. Parliament approved an additional fiscal support package for 2021. The package extends the sunset clauses of several existing measures, including closure and resistance subsidies and authorized withdrawal of third-pillar pension savings. It also raises social security and family support benefits and expands the incentives for employment and domestic travel in the form of a new travel gift. The overall impact on the 2021 deficit is projected to be modest—about 0.2 percent of GDP—to a significant degree offset by better than expected revenue in 2021Q1.