Reykjavik (IFN) Iceland's unemployment rate fell in the first quarter, while wages grew strongly in March, according to figures published by Statistics Iceland on Wednesday.
The agency said unemployment fell to 2.4% in the first quarter from 2.7% the previous quarter, while wage growth in March was 0.3% or 8.6% in the last 12 months.
Analysts are expecting the combination to fuel inflation, which the Icelandic central bank will probably combat with further monetary tightening. Glitnir Bank is expecting rates to be raised by 50-75 basis point on May 18.
"Together with krona weakness (this) should push CPI growth well above the current 5.5% year on year in the months ahead. The central bank will have no option but to hike further," said Beat Siegenthaler, analyst at TD Bank, who expects the key interest rate to reach a peak of 13% from 11.50% currently.
The krona has weakened over 1% since the open Wednesday in addition to the 4% weakening since higher-than-expected inflation was reported last week.
A tight labor market with high wage growth is one of several factors pushing inflation upwards.
Kaupthing wrote in a note that it expects inflation to reach 6% in April.
"Inflation will peak in the beginning of 2007 at around 7%," Kaupthing said. "Research expects average inflation in 2006 to be around 5.8%, around 4.5% in 2007 and around 2.5% in 2008."
After the unemployment data, the next potential driver for Icelandic markets Wednesday will likely be the planned auction of up to ISK1.5 billion in Treasury notes at 1400 GMT.
Investors will be watching the result after the last two auctions weren't completed because the government considered the yields offered by the market to be too high.
Should investors show little interest in the Icelandic bonds, the currency could take another hit, which in turn would give more upside to inflation, analysts say.
Sources: Dow Jones; www.statice.is
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