Iceland: Risk of hard landing
Expansionary government measures have rekindled demand and inflation pressures at a time when imbalances in the economy remain substantial. Still, tight monetary policy is expected to eventually succeed in slowing the economy, taming inflation and reducing imbalances. However, the slow and uneven adjustment process leaves the economy vulnerable to changes in foreign investor sentiment, especially in a context of fragile global financial market conditions, and has increased the risk of a harder landing of the economy.
The authorities should not hesitate to tighten the monetary stance further if this is necessary to anchor inflation expectations at the official target and thereby minimise the second-round effects of a possible exchange-rate depreciation. To facilitate the task of monetary policy, priority should be given to reforming the public Housing Financing Fund’s operations; moreover, the implementation of new public investment projects should be made dependent on progress in cooling down the economy.
No. 264/265, December 2007-January 2008
• OECD Economic Outlook No. 82, December 2007
• Visit www.oecd.org/iceland
• All OECD Observer articles on Iceland