Economic Outlook for Iceland - Forecast 2007 to 2009

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High policy rate paves the way to equilibrium

The Icelandic economy is slowly moving towards equilibrium with a contraction in national expenditure this year, but growth will nevertheless be positive due to a turnaround in foreign trade led by a surge in aluminium exports. The ISK exchange rate will be supported by strong buying side and continue to fluctuate within a relatively narrow range due to the considerable interest-rate differential between Iceland and abroad. This range will undoubtedly widen next year, however. Kaupthing believes that inflation will be around target in mid-2008 and that the current account deficit will persist.

In brief:

  • Economic growth in 2007 will be positive due to a turnaround in foreign trade led by a surge in aluminium exports.
  • The ISK exchange rate will be supported by strong buying side and continue to fluctuate within a relatively narrow range.
  • There are indications that the economy is starting to slow down as the main aluminium projects are being finalized.
  • Kaupthing Research projects economic growth to be 2% in 2007, 4.2% in 2008 and 2.8% in 2009.
  • Growth in 2008 is mainly explained by an increase in exports as well as growing private consumption.
  • Kaupthing Research believes that inflation will be around target in mid-2008 and that the current account deficit will persist.
  • The Central Bank's current cycle of policy rate hikes is over in Kaupthing Research's view.
  • Real interest rates have probably already peaked in the current business cycle.
  • The economy will be moving towards greater equilibrium with a tight monetary stance and large hydropower and aluminium sector investments drawing to an end.

To download the "Economic outlook for Iceland - forecast 2007 to 2009" on acrobat click here.

About Kaupthing Bank
Kaupthing Bank offers comprehensive commercial and investment banking services to individuals, companies and institutional investors. The Bank is a leading player in all the main areas of the Icelandic financial market, and in addition to Iceland, the Bank's key markets are Denmark and the United Kingdom. The Bank focuses on the growth and development of its international activities and aims to be one of the leading investment banks in northern Europe.

Kaupthing Bank operates in ten countries with its headquarters located in Reykjavík. As of 31 December 2006 the number of full-time equivalent positions was 2,719 at Kaupthing Bank and its subsidiaries.

For further information on Kaupthing visit the bank's website, http://www.kaupthing.com.

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Asgeir Jonsson
Kaupthing Bank
+354 444 6957
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