The Central Bank of Iceland has decided to maintain the key interest rate at 9.25%, with inflation decreasing and economic growth slowing. Long-term inflation expectations persist, amidst uncertainties from wage negotiations and the ongoing geological unrest on the Reykjanes peninsula.
Long-term inflation expectations remain unchanged
The Central Bank of Iceland’s Monetary Policy Committee has decided to maintain the key interest rate at 9.25%, unchanged since August.
In a press release published this morning, the Committee observes that the effects of monetary policy are becoming increasingly evident. Real interest rates – which adjusts the nominal interest rate for the effects of inflation to show the true return on an investment or savings – have risen, and inflation has somewhat subsided since the Committee’s November meeting, with underlying inflation also decreasing.
The Monetary Policy Committee believes there are indications that economic growth is slowing down faster than previously expected. According to the Central Bank’s latest forecast, tensions in the national economy are decreasing, and are expected to turn into slack by the end of the year. Thus, inflation prospects have improved.
However, long-term inflation expectations have remained relatively unchanged and somewhat above the target: “Although the labour market has slowed, tension still exists. Inflation could therefore continue to be persistent. There is also uncertainty regarding the outcomes of wage negotiations and possible fiscal measures related to them and due to geological unrest on the Reykjanes Peninsula.”
The press release notes that the formulation of monetary policy in the near future will, as before, depend on the development of economic conditions, inflation, and inflation expectations.
The interest rates will be as follows:
- Overnight loans: 11.0%
- Seven-day collateralized loans: 10.0%
- Seven-day term deposits: 9.25%
- Current accounts: 9.0%