Central Bank Raises Key Interest Rate by 0.75% Skip to content
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Photo: Golli. Central Bank Governor Ásgeir Jónsson.

Central Bank Raises Key Interest Rate by 0.75%

The Central Bank of Iceland has raised interest rates by 0.75 percentage points. The hike takes the Bank’s key interest rate to 2.75%.

Decade-high inflation rates

In the shadow of rising inflation, the Monetary Policy Committee (MPC) of the Central Bank of Iceland has decided to raise the Bank’s interest rates by 0.75 percentage points. The Bank’s key interest rate – the rate on seven-day term deposits – will, therefore, be 2.75%.

The inflation rate in January was 5.7% – the highest since April of 2012 – and the Central Bank predicts an inflation rate of +5% in 2022 (+5.8% in the first quarter), which is double the Bank’s target.

As noted in an announcement this morning, the MPC will not only raise key interest rates but also employ all of its available instruments to ensure that inflation rates subside to target levels within an acceptable timeframe.

More jobs, less unemployment – but “considerable uncertainty”

The increase in interest rates coincides with the publication of the latest edition of the Monetary Bulletin (Peningamál). (The Monetary Bulletin, published on a quarterly basis, contains an “inflation and macroeconomic forecast along with comprehensive analysis of economic and monetary developments and prospects.”)

As noted in the Bulletin, GDP growth exceeded November forecasts by 1%; GDP growth in 2021 was 4.9%, and the Central Bank predicts similar growth in 2022.

“Jobs have continued to grow, unemployment has decreased, and the production slack that formed in the wake of the COVID-19 pandemic is expected to disappear. There is, however, considerable uncertainty.”

The MPC states that inflation outlooks have worsened considerably since the committee’s last meeting. The headline inflation rate has risen to an estimated 4%. Furthermore, inflationary expectations have increased according to several indicators, with the rise in housing prices having a considerable effect, in addition to increases in several items of domestic expenditure.

Non-indexed mortgages a worry

As reported by Kjarninn yesterday, Drífa Snædal, President of the Icelandic Confederation of Labour, wrote a letter to the MPC yesterday asking it to refrain from raising interest rates.

In her letter, Drífa stated that “sharp increases in interest rates have already put many households in a difficult spot. Many households have committed to non-indexed mortgages, owing both to favourable conditions and to indirect encouragement on behalf of the government and the Central Bank.”

The Central Bank will hold a live broadcast at 9.30 AM.

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