Formation of new Icelandic Government opens door for further rate cuts

In the land of fire and ice, currency movements in 2016 resembled an erupting volcano rather than a creeping glacier. The appreciating króna put downward pressure on inflation, prompting the Central Bank of Iceland (CBI) to cut interest rates twice. While recent capital account liberalisation steps could take some of the heat off the currency, we expect it to continue to appreciate. And as the formation of a centre-right government reduces the risk of loose fiscal policy, there is less cause for the CBI to hold back from another rate cut.