Iceland’s Central Bank Holds Interest Rates Steady Skip to content

Iceland’s Central Bank Holds Interest Rates Steady

By Ragnar Tómas

Central Bank Ásgeir Jónsson seðlabankastjóri
Photo: Photo: Golli. Current Central Bank Governor, Ásgeir Jónsson.

The Central Bank of Iceland has opted to maintain its current rates at 9.25% for seven-day term deposits. This decision reflects ongoing economic tensions and slower than expected declines in inflation, despite recent wage agreements and fiscal measures.

Hopes of lower interest rates

Speaking to RÚV yesterday, Finance Minister Sigurður Ingi Jóhannsson stated that he believed the Central Bank had the leeway to lower interest rates based on current economic conditions. He specifically mentioned new wage agreements and modest expenditures in the government’s budget.

The Finance Minister’s hopes were dashed this morning, when the Monetary Policy Committee of the Central Bank of Iceland decided to keep the bank’s interest rates unchanged. The main rate of the bank, the interest on seven-day term deposits (the type of bank deposit account where funds are locked in for a short period of seven days), will therefore remain at 9.25%.

As noted in a press release on the Monetary Policy’s decision, inflation has continued to decrease and was measured at 6% in April: “Inflation excluding housing has decreased faster, and core inflation is now at 5%. Inflation expectations have declined on some measures but are still above target.”

The press release further notes that “the growth of domestic demand has slowed as monetary restraint is tight” and “a slowdown in economic growth is expected this year.” Nonetheless, tensions in the national economy are greater than previously thought, and inflation is decreasing more slowly according to the Central Bank’s new forecast.

Apartment prices impacting CPI

The new Monetary Bulletin, published by the Central bank, sheds further light on the state of inflation in Iceland. As noted by RÚV, the Bulletin notes that price increases in public services and housing, particularly due to a rise in apartment prices in rural areas, had the greatest impact on the consumer price index this quarter.

“Apartment prices have recently increased significantly, especially in Reykjanes. Residents of Grindavík seeking new homes due to seismic activity play a major role in this trend. Prices for groceries and general services saw a moderate rise in the first quarter,” RÚV reports.

Effects of wage agreements, fiscal measures not yet evident

As noted by the Monetary Policy Committee, the effects of recently concluded wage agreements and fiscal measures on demand have not yet fully emerged, despite the Finance Minister’s hopes. “Although the labour market has slowed, there is still tension that could push wage drift with corresponding effects on inflation.”

The Monetary Policy Committee believes there are increased chances that the current level of restraint is sufficient to bring inflation to target within an acceptable time frame.

As of May 8, 2024, the interest rates are as follows:

Overnight loans 11.0%
Collateralized loans for 7 days 10.0%
Seven-day term deposits 9.25%
Transaction accounts 9.0%

This article was updated at 10:21 AM

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