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Central Bank Ásgeir Jónsson seðlabankastjóri
Photo: Golli. Central Bank Governor Ásgeir Jónsson.

Central Bank Continues Raising Interest Rates

A 0.25% to the Central Bank’s key interest rate has now brought it up to 1.5%. The bank’s Monetary Policy Committee (MPC) announced the decision to raise the rate in a press release today. The MPC consistently lowered interest rates throughout last year in response to the pandemic recession but now says it expects the domestic economic recovery to continue.

The Central Bank’s key interest rate reached a historic low of 0.75% in November last year. In comparison, rates in January 2020 stood at 3% and in January 2019 at 4.5%. This is the Bank’s third interest rate hike since May, indicating a change in direction as the economic forecast has improved.

The Central Bank also tightened mortgage regulations at the end of last month, stating that rising real estate prices had “gone hand-in-hand with increased household debt.” The move, which entails instituting a maximum debt-to-service ratio of 35% for borrowers (40% for first-time buyers) is intended to support stability on the housing market.

Today’s press release says, however, that housing accounted for “a large share of headline inflation in September.” Although underlying inflation is declining, the bank states “there is cause for concern in that inflation expectations appear to have begun rising again.” The bank states it will apply tools to ensure that inflation eases back to target.

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