The Central Bank of Iceland’s key interest rate will be raised by 0.75% to 5.5%, the bank’s Monetary Policy Committee announced today. The hike was expected by industry experts and continues a trend of tightening monetary policy in response to inflation and market conditions.
Macroeconomic forecast improves
GDP in Iceland is set to measure nearly 6% this year, according to the Central Bank’s updated forecast, some 1.3% higher than the May forecast. This is due to more robust private consumption growth and a more rapid rebound in tourism than was projected earlier this year. Job numbers continue to rise in Iceland and unemployment to fall.
Continued inflation expected
While the economic outlook has improved, the inflation outlook has continued to deteriorate, the Central Bank reports. Inflation rose to 9.9% in July and is forecast to peak at 11% late this year. The bleaker outlook “reflects stronger economic activity than was forecast in ay, as well as more persistent house price inflation and higher global inflation,” the statement from the Monetary Policy Committee reads.
The MPC added it was likely that the monetary stance will be tightened even further “so as to ensure that inflation eases back to target within an acceptable time frame.”
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.
