Central Bank Raises Key Interest Rates by 0.5%

Central Bank Ásgeir Jónsson seðlabankastjóri

The Monetary Policy Committee of Iceland’s Central Bank has announced that it will be raising key interest rates by 0.5%, with short-term interest rates (seven-day term deposits) now sitting at 6.5%, RÚV reports. Although the housing market has cooled, and global inflation slightly eased, inflationary pressures remain high.

Inflation outlook worsened

At a briefing held at the Culture House in Reykjavík this morning (there is construction work ongoing within the Central Bank’s meeting hall), the Monetary Policy Committee (MPC) of the Central Bank announced its decision to raise key interest rates by 0.5%.

As noted in the Statement of the Monetary Policy Committee published this morning, although the housing market has begun to cool and global inflation has eased slightly, “inflationary pressures are still pronounced” and price increases “widespread:”

“The inflation outlook has worsened since the MPC’s last meeting, and although inflation has most likely peaked, bringing it back to target [rates] will take longer than previously anticipated. The deterioration in the outlook stems in particular from the recently finalised private sector wage agreements, which entail considerably larger pay rises than previously assumed. Furthermore, the króna has depreciated, and the outlook is for a larger positive output gap during the forecast horizon,” the statement reads.

More restraint required in the near future

As noted by RÚV, inflation increased in January and was recorded at 9.9%. In light of this, the MPC believes that it is necessary to increase restraints in the near future in order for inflation to subside. According to the Monetary Bulletin, inflation is expected to average 9.5% in the first quarter of this year, which is 1% more than was expected in November.

International inflation remains high even though it has subsided from last year’s peak, and there remains considerable uncertainty about the economic outlook, the Monetary Bulletin notes. The progress of the war in Ukraine will have a lot to do with international economic development, which will inevitably also affect this country.

The Monetary Bulletin also states that, according to the Bank’s new macroeconomic forecast, GDP growth in 2022 measured 7.1%: “far above the November forecast and, if the forecast materialises, the strongest GDP growth rate since 2007. GDP growth is set to weaken in 2023 but the labour market is expected to remain tight, however.”

Central Bank Lowers Interest Rates by 0.50%

Central Bank

In a statement released this morning, the Monetary Policy Committee (MPC) of the Central Bank of Iceland announced that it has decided to lower the Bank’s interest rates by 0.5%. The Bank’s key interest rate – the rate on seven-day term deposits – will, therefore, be 2.25%.

The Committee also announced its decision to lower deposit institutions’ average reserve requirement from 1% to 0%.

“The fixed reserve requirement will remain unchanged at 1%. The reduction in the average reserve requirement and changes in the treatment of the fixed reserve requirement in liquidity rules will ease the banks’ liquidity position and give them greater scope to respond to changed conditions in the domestic economy.”

With its actions, the Central Bank hopes to “ease the monetary stance” given the worsening economic outlook following the accelerated spread of the COVID-19 virus. The Committee will continue to monitor economic developments and will use “the tools at its disposal to support the domestic economy.”

Speaking at a press conference this morning, Governor of the Central Bank Ásgeir Jónsson announced that the Bank would hold additional meetings in the coming days if required.