Central Bank Announces 14th Consecutive Rate Hike

Central Bank

The Monetary Policy Committee of the Central Bank of Iceland announced this morning that it would be raising the policy rate by 0.50%. This is the fourteenth rate hike in a row, with the bank’s main interest rate currently sitting at 9.25%.

Inflation subsided slightly

In its fourteenth consecutive rate hike, the Central Bank announced this morning that it would be raising the key interest rate by 0.50%, bringing the bank’s main interest rate to 9.25%. The previous increase of 1.25% was announced in May.

According to the announcement, inflation has subsided somewhat – down to 7.6% in July – since the last interest rate decision. The short-term inflation outlook has improved. However, inflation expectations are still above the bank’s target of 2.5% and there is a risk that it will prove persistent. “In light of this, it is necessary to further tighten the reins of monetary policy. In particular, it is important to prevent the interaction of rising wages and prices.”

The announcement also notes that the housing component’s contribution to inflation has decreased, international price increases have decreased, and the exchange rate of the króna has increased. However, domestic price increases have proven to be persistent and are still on a broad basis. Underlying inflation has, therefore, decreased more slowly than measured inflation; it was 6.7% in July.

Governor calls on the government to exercise “prudence”

In a press conference following the announcement, Þórarinn G. Pétursson, Chief Economist at the Central Bank, noted that the number of jobs is increasing rapidly; during the second quarter of the year, the unemployment rate was 2.8%, the lowest since the fall of 2017. The number of companies in search of employees is decreasing, Þórarinn noted, although the percentage was still well above the historical average.

Þórarinn also noted that economic growth was lower than the Central Bank expected in May. The same held for private consumption: 5% when the Central Bank had forecast expected almost 7%. The difference is mainly in Icelanders’ spending abroad, which turned out to be less significant than expected.

Governor of the Central Bank Ásgeir Jónsson emphasised that a fifty-point hike in the interest rate was significant. The economy remained strained, with wages witnessing a 10% rise year-on-year and notable surges in domestic product prices. According to Ásgeir, the Central Bank has already made substantial interest rate adjustments, and its impact will be closely monitored. The upcoming Monetary Policy Committee meeting is just around the corner.

Regarding next year’s budget proposal, Ásgeir mentioned that the Central Bank did not have specific requests. However, they hope the government exercises utmost prudence in its operations.

Read More: A Króna for Your Thoughts (Interview with Governor of the Central Bank Ásgeir Jónsson)

Central Bank Raises Interest Rate 1%, Now at 7.5%

central bank of iceland

The Monetary Policy Committee of the Central Bank of Iceland has raised interest rates a further 1%. This is the twelfth rate hike in a row, and key interest rates, that is, the interest rate on seven-day term deposits, now sits at 7.5%.

The interest rate in Iceland has not been higher since 2010, when the Icelandic economy was still recovering from the banking collapse.

Inflation Rate Now 10%, Up 1.39% from January

In a statement released by the Central Bank of Iceland, the rate hikes are described as a response to continuing inflationary pressures. Inflation in Iceland currently sits at 10.2%, far above the Central Bank’s goal. Despite a cooling housing market, the Central Bank still forecasts future increases in the inflation rate.

For comparison, headline inflation rates in Europe currently average around 8.5%. Key European Central Bank interest rates were raised to 3.5% in response to recent upsets in international banking, including the UBS takeover of Credit Suisse.

The Central Bank has also pointed to a tight labour market in Iceland, with tense negotiations between labour unions and employers, and relatively high numbers of job openings, driving up wages.

interest rates in iceland
Central Bank of Iceland: Interest Rate Since Jan 2019

In their statement on the latest rate hike, the Central Bank said: “Under these circumstances, it is important to prevent a wage-price spiral, particularly in view of the strong demand pressures in the economy and the upcoming wage negotiations. The MPC will apply its policy instruments so as to ensure a better balanced economy and bring inflation back to target.”

Interest rates in Iceland now stand as follows:

Overnight loans 9.25%
Seven-day collateralised loans 8.25%
Seven-day term deposits 7.50%
Current accounts 7.25%

Notably, predictions last week estimated the latest rate hike would only account for .75%.

Banks Raise Interest on Non-Indexed Loans

currency iceland

All three of Iceland’s commercial banks announced that they would be raising interest rates on Friday. RÚV reports that Arion Bank, Íslandsbanki, and Landsbankinn are raising interest rates on non-indexed loans, as well as deposits. The hike comes on the heels of a 0.5% increase on key interest rates last week.

Interest rates on most types of non-indexed loans went up by 0.5% at Arion Bank, Íslandsbanki, and Landsbankinn. New non-indexed mortgages offered by Landsbankinn interest rates had a slightly lower hike; those went up 0.25-0.30%.

Read More: Inflation Rate Continues Climb, Now at 9.9% (January 2023)

Non-indexed interest rates on the banks’ home loans are now in the range of 8.0-8.5%, while interest rates on indexed loans remain unchanged.

Deposit rates were also raised, in most cases around 0.5%.

Looking Back: Mortgage Payments Continue Rising in Iceland (August 2022)

Friday’s interest increases come on the heels of the Central Bank’s decision to raise key interest rates by 0.5% last week, bringing it up to 6.5%. This was the Central Bank’s 11th increase on the key interest rate in a row. The lowest this rate has been is 0.75% in the spring of 2021.

Interest rates have not been higher since 2009.

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 Raises Interest Rates by 1%

Central Bank

The Central Bank of Iceland’s key interest rate will be raised to 3.75%, rising ever-closer to pre-pandemic figures. The Monetary Policy Committee (MPC) announced a 1% interest rate hike this morning. The MPC says the economic outlook has deteriorated due to the impact of Russia’s invasion of Ukraine.

In March 2019, the Central Bank’s key interest rate stood at 4.5%. It was lowered repeatedly throughout the pandemic in efforts to bolster the economy and maintain stability on the housing market. Interest rates reached a historic low of 0.75% in November 2020, but the Central Bank has been steadily raising rates once more over the past year.

Moderate growth expected this year

Despite the worse outlook as compared to February’s forecast, the MPC says there are “signs of strong domestic economic activity” in Iceland, including a tightening labour market. GDP growth is forecast at 4.6% for the year 2022, and a growth rate of just under 3% in 2023 and 2024.

Inflation woes continue

Combating inflation continues to be a challenge, according to the MPC, which cites “house prices and other domestic cost items” as strong drivers of inflation, as well as global oil and commodity prices. Underlying inflation currently measures 5%, with inflation in the month of April measuring 7.2%. The Central Bank predicts that inflation will rise above 8% in the third quarter of this year.

The MPC expects interest rate hikes and “tighter borrower-based measures” to slow down house price inflation and domestic demand. The Committee states, however, that it is likely the monetary stance will have to be tightened even further in coming months to ease inflation. “Decisions taken at the corporate level, the labour market, and in public sector finances will be a major determinant of how high interest rates must rise,” the notice concludes.

Central Bank Raises Key Interest Rate by 0.75%

Central Bank

The Central Bank of Iceland has raised interest rates by 0.75 percentage points. The hike takes the Bank’s key interest rate to 2.75%.

Decade-high inflation rates

In the shadow of rising inflation, the Monetary Policy Committee (MPC) of the Central Bank of Iceland has decided to raise the Bank’s interest rates by 0.75 percentage points. The Bank’s key interest rate – the rate on seven-day term deposits – will, therefore, be 2.75%.

The inflation rate in January was 5.7% – the highest since April of 2012 – and the Central Bank predicts an inflation rate of +5% in 2022 (+5.8% in the first quarter), which is double the Bank’s target.

As noted in an announcement this morning, the MPC will not only raise key interest rates but also employ all of its available instruments to ensure that inflation rates subside to target levels within an acceptable timeframe.

More jobs, less unemployment – but “considerable uncertainty”

The increase in interest rates coincides with the publication of the latest edition of the Monetary Bulletin (Peningamál). (The Monetary Bulletin, published on a quarterly basis, contains an “inflation and macroeconomic forecast along with comprehensive analysis of economic and monetary developments and prospects.”)

As noted in the Bulletin, GDP growth exceeded November forecasts by 1%; GDP growth in 2021 was 4.9%, and the Central Bank predicts similar growth in 2022.

“Jobs have continued to grow, unemployment has decreased, and the production slack that formed in the wake of the COVID-19 pandemic is expected to disappear. There is, however, considerable uncertainty.”

The MPC states that inflation outlooks have worsened considerably since the committee’s last meeting. The headline inflation rate has risen to an estimated 4%. Furthermore, inflationary expectations have increased according to several indicators, with the rise in housing prices having a considerable effect, in addition to increases in several items of domestic expenditure.

Non-indexed mortgages a worry

As reported by Kjarninn yesterday, Drífa Snædal, President of the Icelandic Confederation of Labour, wrote a letter to the MPC yesterday asking it to refrain from raising interest rates.

In her letter, Drífa stated that “sharp increases in interest rates have already put many households in a difficult spot. Many households have committed to non-indexed mortgages, owing both to favourable conditions and to indirect encouragement on behalf of the government and the Central Bank.”

The Central Bank will hold a live broadcast at 9.30 AM.