Central Bank Keeps Interest Rates Steady Amid Geological Unrest

Central Bank

The Monetary Policy Committee of the Central Bank of Iceland has decided to keep the bank’s interest rates steady at 9.25%, despite worsening inflation expectations and economic tensions. This decision reflects the committee’s caution due to the uncertain economic impact of the geological unrest on the Reykjanes peninsula.

Inflation expectations worsened

In a statement issued by the Monetary Policy Committee of the Central Bank at 8.30 AM, the committee announced that it would be keeping the bank’s interest rates unchanged at 9.25%.

The statement reveals that inflation slightly decreased month-over-month in October, registering at 7.9%. Underlying inflation also showed a decline. There are ongoing indications of a slowdown in private consumption and investment.

“According to the Central Bank’s new forecast, inflation expectations have worsened. The tension in the national economy has proven greater than previously thought, and the value of the krona has decreased. Inflation expectations remain high, and cost increases seem to have a more significant and prolonged impact on inflation than before.”

The announcement goes on to state that even though the effects of interest rate hikes in recent months are becoming more evident, worse inflation prospects suggest that further tightening of monetary policy might be necessary. 

“Despite this, the Monetary Policy Committee has decided to maintain current interest rates for now, given the uncertainty about the economic impact of geological unrest on the Reykjanes peninsula. The future monetary policy will continue to be shaped by the development of economic conditions, inflation, and inflation expectations.” 

The interest rates will be as follows:

  1. Overnight loans: 11.0%
  2. Seven-day collateralized loans: 10.0%
  3. Seven-day term deposits: 9.25%
  4. Current accounts: 9.0%

Central Bank Breaks Rate Hike Streak Amid Economic Slowdown

Central Bank Ásgeir Jónsson seðlabankastjóri

The Monetary Policy Committee of the Central Bank of Iceland has halted a trend of interest rate hikes by maintaining the key interest rate at 9.25%. The committee’s decision to hold steady comes in the face of economic uncertainty, with future monetary policy adjustments hinging on the evolving economic conditions, inflation trends, and inflation expectations.

A notable slowdown in economic momentum

The Monetary Policy Committee of the Central Bank of Iceland has decided to keep the bank’s interest rate at its current level. Consequently, the principal interest rate, denoted by the seven-day fixed deposit rate, will continue to stand at 9.25%. This was disclosed in a formal announcement from the Central Bank.

This decision marks a departure from the previous trend, where the key interest rates had been consecutively raised fourteen times. According to the announcement: “Overall, the development of economic matters has been in line with the committee’s assessment during the last meeting. Inflation has resurged, measuring at 8% in September. Inflation excluding housing also increased, although the underlying inflation has slightly eased. Indications are that the frequency of price increases has diminished, and they are not as widespread as before. Although inflation expectations remain excessively high, they have decreased to some extent according to some benchmarks.”

The announcement notes that economic growth measured 5.8% in the earlier part of the year, while it was over 7% last year. Hence, there has been a notable slowdown in economic momentum. Indications suggest a further slowing of demand in the third quarter of the year. However, there is some tension in the labour market and the economy. The real interest rates of the bank have increased over the course of the year, and the effects of the bank’s interest rate hikes are becoming more pronounced.

“At this juncture, there is some uncertainty regarding economic progression and whether the current restraint is adequate. The committee has therefore decided to hold steady, but in the next meeting, a new national economic and inflation forecast of the bank will be available. Monetary policy will henceforth be guided by the development of economic conditions, inflation, and inflation expectations,” the announcement reads.