Iceland’s Central Bank Holds Interest Rates Steady

Central Bank Ásgeir Jónsson seðlabankastjóri

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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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.

Iceland’s Interest Rates Pass Pre-Pandemic Heights

Central Bank Ásgeir Jónsson seðlabankastjóri

The Monetary Policy Committee of the Central Bank of Iceland has decided to raise the bank’s interest rates by 1%. The bank’s key interest rate is now 4.75%, higher than it has been since March 2019, when it stood at 4.5%. The hike continues a trend of rising rates, with the Central Bank citing inflation as a key factor.

Growth in Iceland but uncertain global outlook

While the Central Bank reports that GDP growth was somewhat stronger in the first quarter of this year than assumed in their May forecast and domestic economic activity remains strong, it underlines that the global economic outlook is “highly uncertain.” Households’ and businesses’ expectations about economic developments have also grown “more tepid,” according to the MPC.

Inflation to continue

Inflation rose to 7.6% in May, with house prices and other domestic cost items cited as “strong drivers of inflation.” Price hikes are widespread and global oil and commodity prices have also risen sharply, the Central Bank notes. Inflation expectations have risen by most measures and are above target.

See Also: Government Approves Measures to Counteract Inflation

“The MPC considers it likely that the monetary stance will have to be tightened even further so as to ensure that inflation eases back to target within an acceptable time frame,” the statement from the committee concludes.

Iceland’s Central Bank lowered interest rates repeatedly throughout the COVID-19 pandemic with the stated aims of bolstering the economy and maintaining stability on the housing market. Rates reached a historic low of 0.75% in November 2020, but the Central Bank began raising rates steadily once more in early 2021.

Central Bank of Iceland’s Interest Rates to Remain Unchanged

Central Bank Ásgeir Jónsson seðlabankastjóri

The Central Bank of Iceland’s new macroeconomic forecast, published in the February Monetary Bulletin anticipates a growth of 2.5 GDP in 2021, and that the rise in unemployment will stall mid-year, although the forecast and Iceland’s economic prospects are heavily dependant on the success and speed of the pandemic response and vaccination efforts. The bank’s key interest rates will remain steady at 0.75%, at least through March.

Domestic demand was more powerful last year than projections expected, and economic contraction less than forecast in November, according to a statement by the Central Bank’s Monetary Policy Committee. The 2021 outlook for export has deteriorated but inflation is likely to lessen quickly as the year progresses.

The Committee has decided to keep the Bank’s interest rates unchanged. The Bank’s key interest rate – the rate on seven-day term deposits – will therefore remain 0.75%, as they have been since November. The rates are at an unprecedented low for Iceland’s Central Bank key interest rates, which stood at 3% January 2020 and 4.5% in January 2019.

The Central Bank of Iceland has issued a new macroeconomic forecast, which finds that domestic demand was stronger last year than anticipated last November. According to the Monetary Policy Committee’s statement: “The outlook is for inflation to measure 3.9% in Q1/2021 but then fall relatively quickly over the course of the year, as there is still a sizeable slack in the economy and the króna has appreciated in recent months.” They do warn that “Economic developments will be affected by the path the pandemic takes, however.” The forecast is based on projections that the majority of the public will be vaccinated by mid-2021, both in Iceland and our main trading partner countries, and border restrictions will remain largely similar to what they currently are.

While the Central Bank’s forecast can inspire hope, expecting a GDP growth of 2.5 over the course of 2021 and 5.1 next year, registered unemployment has risen this year and was at nearly 11% in December, up by 6.4 percentage points since the previous year. The forecast expects unemployment to start to go down mid-year but nevertheless to remain higher than before the pandemic.

Inflation in January rose to 4.3% in January, making it the first month since December 2013 that inflation is higher than the Central Bank’s upper deviation threshold of the inflation target. Despite that, there are indications that inflation will decline rapidly in the near future, as there is a sizeable slack in the economy and inflation expectations have remained relatively stable.