Central Bank Raises Interest Rate 1%, Now at 7.5% Skip to content

Central Bank Raises Interest Rate 1%, Now at 7.5%

By Erik Pomrenke

central bank of iceland
Photo: Golli.

The Monetary Policy Committee of the Central Bank of Iceland has raised interest rates a further 1%. This is the twelfth rate hike in a row, and key interest rates, that is, the interest rate on seven-day term deposits, now sits at 7.5%.

The interest rate in Iceland has not been higher since 2010, when the Icelandic economy was still recovering from the banking collapse.

Inflation Rate Now 10%, Up 1.39% from January

In a statement released by the Central Bank of Iceland, the rate hikes are described as a response to continuing inflationary pressures. Inflation in Iceland currently sits at 10.2%, far above the Central Bank’s goal. Despite a cooling housing market, the Central Bank still forecasts future increases in the inflation rate.

For comparison, headline inflation rates in Europe currently average around 8.5%. Key European Central Bank interest rates were raised to 3.5% in response to recent upsets in international banking, including the UBS takeover of Credit Suisse.

The Central Bank has also pointed to a tight labour market in Iceland, with tense negotiations between labour unions and employers, and relatively high numbers of job openings, driving up wages.

interest rates in iceland
Central Bank of Iceland: Interest Rate Since Jan 2019

In their statement on the latest rate hike, the Central Bank said: “Under these circumstances, it is important to prevent a wage-price spiral, particularly in view of the strong demand pressures in the economy and the upcoming wage negotiations. The MPC will apply its policy instruments so as to ensure a better balanced economy and bring inflation back to target.”

Interest rates in Iceland now stand as follows:

Overnight loans 9.25%
Seven-day collateralised loans 8.25%
Seven-day term deposits 7.50%
Current accounts 7.25%

Notably, predictions last week estimated the latest rate hike would only account for .75%.

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