Iceland: Staff Report for the 2006 Article IV Consultation
IMF Staff Country Reports, August 8, 2006
Source details
- Canonical URL
- Iceland: Staff Report for the 2006 Article IV Consultation
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Bibliographic details
- Published: August 8, 2006
- Series: IMF Staff Country Reports
- DOI: https://doi.org/10.5089/9781451819328.002
Major findings
- Over the last three years, a rapid expansion in domestic demand has dramatically widened the current account deficit in Iceland.
- Demand expanded faster than supply, and evidence of overheating is widespread.
- Monetary policy has tightened, but, until recently, the impact has been channeled primarily through the exchange rate.
- Despite hikes in the policy rate, increased competition in the mortgage market eased household credit conditions, and household indebtedness has surged.
- The financial market turbulence early in the year ended the favorable conditions that had allowed banks to fund rapid balance sheet growth.
Financial sector developments
- Rapid bank balance sheet growth was supported by favorable funding conditions that ended with financial market turbulence early in the year.
- Increased competition in the mortgage market mitigated the transmission of higher policy rates to household credit conditions.
Policy implications and priorities
- Tightening monetary policy has relied heavily on exchange-rate effects; attention to alternative channels of policy transmission may be warranted given eased household credit conditions.
- Addressing surging household indebtedness is a priority given the combination of increased mortgage competition and rising policy rates.
- Financial sector stability considerations are central after the end of favorable external funding conditions for banks.
Content in this bundle
- _cr06296 - Executive Summary and Selected Sections