The Central Bank raises key interest rates by 0.5 percentage points
The Monetary Policy Committee of the Central Bank of Iceland has decided to raise the bank’s interest rate by 0.5 percentage points. The bank’s main interest rate on seven-day fixed deposits, will become 6.5%.
In spite of a cooling housing market, inflation rose in January to 9.9%, while underlying inflation remained unchanged at 7%. Even though global inflation has decreased slightly, inflationary pressures are still considerable and price increases widespread.
Worsening inflation outlook
It is noted that the inflation outlook has deteriorated since the last meeting of the committee. While the forecast is still that the inflation has peaked, it will take longer to reach the bank’s inflation target than previously thought.
Article on Iceland Monitor
The high interest environment is like a magic trap that literally absorbs money
Wages and currency exchange
In the announcement the Central Bank explains the weaker outlook by three things. Firstly, the “recently finalised private sector wage agreements, which entail considerably larger pay rises than previously assumed.” Secondly, it points out an unfavourable currency exchange rate of the ISK króna. Finally it is “the prospect of a more accommodative fiscal stance than was provided for in the Bank’s November forecast, even though the fiscal deficit will narrow this year. Long-term inflation expectations are still well above target, and the Bank’s real rate has declined since the MPC’s last meeting.”
2022 could be the strongest GDP growth since 2007
"According to the Bank’s new macroeconomic forecast, year-2022 GDP growth 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.
The MPC considers it likely that the monetary stance will have to be tightened even further in coming term so as to ensure that inflation eases back to target within an acceptable time frame."