The Monetary Policy Committee of the Central Bank of Iceland has decided to raise the bank’s interest rates by 1%. The bank’s key interest rate is now 4.75%, higher than it has been since March 2019, when it stood at 4.5%. The hike continues a trend of rising rates, with the Central Bank citing inflation as a key factor.
Growth in Iceland but uncertain global outlook
While the Central Bank reports that GDP growth was somewhat stronger in the first quarter of this year than assumed in their May forecast and domestic economic activity remains strong, it underlines that the global economic outlook is “highly uncertain.” Households’ and businesses’ expectations about economic developments have also grown “more tepid,” according to the MPC.
Inflation to continue
Inflation rose to 7.6% in May, with house prices and other domestic cost items cited as “strong drivers of inflation.” Price hikes are widespread and global oil and commodity prices have also risen sharply, the Central Bank notes. Inflation expectations have risen by most measures and are above target.
“The MPC considers it likely that the monetary stance will have to be tightened even further so as to ensure that inflation eases back to target within an acceptable time frame,” the statement from the committee concludes.
Iceland’s Central Bank lowered interest rates repeatedly throughout the COVID-19 pandemic with the stated aims of bolstering the economy and maintaining stability on the housing market. Rates reached a historic low of 0.75% in November 2020, but the Central Bank began raising rates steadily once more in early 2021.