Ásgeir Jónsson, Governor of the Icelandic Central Bank, announced today in a presentation that key interest rates would be raised again by .25%. Now sitting at 5.75% for seven-day term deposits, the interest rate is a its highest level since 2016.
Interest rates have risen sharply in recent months to combat inflation, which peaked at 9.9% in July of this year. It has since dropped to 9.3%, still well above the Central Bank’s target of 2.5%.
In the announcement on the Central Bank’s website, it states that “indicators suggest that recent interest rate hikes have slowed overall demand growth and housing market activity. Headline inflation measured 9.3% in September and has fallen by 0.6 percentage points since the MPC’s August meeting. Underlying inflation rose between meetings, however. There are also signs that inflation expectations have begun to decline again, although they are still above the Bank’s inflation target.”
For the first half of 2022, GDP grew at a strong rate of 6.8%, but slowdowns are expected in the winter months.
The announcement also states that “the global economic outlook has deteriorated and uncertainty has grown, which could cause domestic demand to ease more quickly than previously assumed.”
The Central Bank remains hopeful that inflation can be brought back down to acceptable levels within a reasonable timeframe, but stresses that many of the decisions driving inflation will be made at the corporate level, in the labour market, and in public sector finances.