Central Bank of Iceland’s Interest Rates to Remain Unchanged Skip to content
Central Bank Ásgeir Jónsson seðlabankastjóri
Photo: Photo: Golli. Current Central Bank Governor, Ásgeir Jónsson.

Central Bank of Iceland’s Interest Rates to Remain Unchanged

The Central Bank of Iceland’s new macroeconomic forecast, published in the February Monetary Bulletin anticipates a growth of 2.5 GDP in 2021, and that the rise in unemployment will stall mid-year, although the forecast and Iceland’s economic prospects are heavily dependant on the success and speed of the pandemic response and vaccination efforts. The bank’s key interest rates will remain steady at 0.75%, at least through March.

Domestic demand was more powerful last year than projections expected, and economic contraction less than forecast in November, according to a statement by the Central Bank’s Monetary Policy Committee. The 2021 outlook for export has deteriorated but inflation is likely to lessen quickly as the year progresses.

The Committee has decided to keep the Bank’s interest rates unchanged. The Bank’s key interest rate – the rate on seven-day term deposits – will therefore remain 0.75%, as they have been since November. The rates are at an unprecedented low for Iceland’s Central Bank key interest rates, which stood at 3% January 2020 and 4.5% in January 2019.

The Central Bank of Iceland has issued a new macroeconomic forecast, which finds that domestic demand was stronger last year than anticipated last November. According to the Monetary Policy Committee’s statement: “The outlook is for inflation to measure 3.9% in Q1/2021 but then fall relatively quickly over the course of the year, as there is still a sizeable slack in the economy and the króna has appreciated in recent months.” They do warn that “Economic developments will be affected by the path the pandemic takes, however.” The forecast is based on projections that the majority of the public will be vaccinated by mid-2021, both in Iceland and our main trading partner countries, and border restrictions will remain largely similar to what they currently are.

While the Central Bank’s forecast can inspire hope, expecting a GDP growth of 2.5 over the course of 2021 and 5.1 next year, registered unemployment has risen this year and was at nearly 11% in December, up by 6.4 percentage points since the previous year. The forecast expects unemployment to start to go down mid-year but nevertheless to remain higher than before the pandemic.

Inflation in January rose to 4.3% in January, making it the first month since December 2013 that inflation is higher than the Central Bank’s upper deviation threshold of the inflation target. Despite that, there are indications that inflation will decline rapidly in the near future, as there is a sizeable slack in the economy and inflation expectations have remained relatively stable.

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