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

Central Bank Raises Interest Rates by 1%

The Central Bank of Iceland’s key interest rate will be raised to 3.75%, rising ever-closer to pre-pandemic figures. The Monetary Policy Committee (MPC) announced a 1% interest rate hike this morning. The MPC says the economic outlook has deteriorated due to the impact of Russia’s invasion of Ukraine.

In March 2019, the Central Bank’s key interest rate stood at 4.5%. It was lowered repeatedly throughout the pandemic in efforts to bolster the economy and maintain stability on the housing market. Interest rates reached a historic low of 0.75% in November 2020, but the Central Bank has been steadily raising rates once more over the past year.

Moderate growth expected this year

Despite the worse outlook as compared to February’s forecast, the MPC says there are “signs of strong domestic economic activity” in Iceland, including a tightening labour market. GDP growth is forecast at 4.6% for the year 2022, and a growth rate of just under 3% in 2023 and 2024.

Inflation woes continue

Combating inflation continues to be a challenge, according to the MPC, which cites “house prices and other domestic cost items” as strong drivers of inflation, as well as global oil and commodity prices. Underlying inflation currently measures 5%, with inflation in the month of April measuring 7.2%. The Central Bank predicts that inflation will rise above 8% in the third quarter of this year.

The MPC expects interest rate hikes and “tighter borrower-based measures” to slow down house price inflation and domestic demand. The Committee states, however, that it is likely the monetary stance will have to be tightened even further in coming months to ease inflation. “Decisions taken at the corporate level, the labour market, and in public sector finances will be a major determinant of how high interest rates must rise,” the notice concludes.

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