The Monetary Policy Committee (MPC) of the Central Bank of Iceland has decided to raise the Bank’s interest rates by 0.5 percentage points. The Bank’s key interest rate will therefore be 2%. This is the Bank’s fourth interest rate hike since May, indicating a change in direction as the economic forecast has improved.
The Central Bank’s key interest rate reached a historic low of 0.75% in November 2020. In comparison, rates in January 2020 stood at 3% and in January 2019 at 4.5%.
According to the Bank’s new macroeconomic forecast, GDP growth is expected to measure about 4% in 2021. Better prospects for exports result in an improved outlook for GDP growth compared to projections from last August. GDP growth next year is expected to measure just over 5%. The Central Bank nevertheless states that “significant uncertainty remains, and as before, economic developments will depend on the path the pandemic takes.”
Inflation rose to 4.5% in October, according to the Central Bank’s statement, and is expected to continue rising in the coming months but then start to ease. Global price increases, a more rapid rebound in domestic economic activity, and rising wage costs are some of the factors behind the rise.