The Monetary Policy Committee of the Central Bank of Iceland raised the policy rate this morning by 1.25%. This is the thirteenth rate hike in a row, with the bank’s main interest rate currently sitting at 8.75%.
Curbing inflation
In its thirteenth consecutive rate hike, the Central Bank announced this morning that it would be raising the key interest rate by 1.25%, bringing the bank’s main interest rate to 8.75%. The previous increase of 1% was announced in March.
According to the announcement, economic activity has been strong so far this year. The central bank’s latest economic forecast projects a notable increase in economic growth, expecting it to reach 4.8% for the year, a significant revision from the previous forecast of 2.6% in February. This revised projection takes into account the anticipated surge in domestic demand and the emergence of heightened activity within the tourism industry, both of which have contributed substantially to the optimistic outlook.
As noted by RÚV, the Governor of the Central Bank has emphasised the necessity of these interest rate hikes to combat inflation. Despite the twelve previous rate hikes, however, the Central Bank has not yet been able to bring inflation under control; the annual inflation rate measured 9.9% in April, well above the bank’s target of 2.5% (the annual inflation rate peaked at 10.2% in February).
The announcement notes that there is an increased likelihood that inflation will prove persistent; underlying inflation continues to increase and large price increases are measured in an increasingly large part of the consumption basket.
Read More: A Króna for Your Thoughts (Interview with Governor of the Central Bank Ásgeir Jónsson)
