Interest-rate hikes “very likely”

The Central Bank of Iceland (CBI) has this morning announced a rise in interest rates of 0.5 percentage points.

The Bank’s Monetary Policy Committee (MPC) has taken their decision in the context of latest figures on Icelandic GDP growth (2.9% in the first quarter of 2015), consumption and investment growth (6.4%), and domestic demand (10%).

Of significance also is the likelihood of higher inflation than initially projected, due to the wage increases recently negotiated on the labour market.

A statement from the CBI issued today states that “[i]n recent MPC statements, the Committee has repeatedly pointed out that large pay increases and strong growth in demand could undermine the recently achieved price stability and require that interest rates be raised again.”

With this move, interest rates for seven-day term deposits rise to 5.00% and for overnight lending, 6.75%. The full CBI statement can be found here.

According to the Governor of the CBI, Már Guðmundsson, “much needs to be done to avoid further interest-rate increases […] in August.” He pointed to the higher pay rises than expected and indicated that “inflation would clearly rise over the coming months”.

Guðmundsson has suggested that further interest rate rises are “very likely”.