Iceland Interest Rate

The Central Bank of Iceland lowered its key interest rate by 50bps to 8.5% in November 2024, the biggest cut in more than three years, citing progress in reducing inflation. Inflation fell to 5.1% in October, with broad-based declines and easing underlying pressures. Inflation expectations have also improved, effectively tightening real interest rates. However, signs of slower economic growth persist, with domestic demand weakening and unemployment rising slightly. Despite these trends, the Central Bank emphasized caution as inflation and expectations remain above target. Policymakers stressed the need for a tight monetary stance to bring inflation down sustainably, while future decisions will depend on economic activity, inflation trends, and expectations.

The Central Bank of Iceland reduced its seven-day term deposit rate by 25 basis points to 9% during its October 2024 meeting, marking the first rate cut since November 2020. The Committee highlighted that inflation has recently declined, reaching 5.4% in September. Underlying inflation has also moderated, and the breakeven inflation rate in the bond market has decreased. Concurrently, economic activity has continued to slow, aligning with the tighter monetary stance. Additionally, there are indications that pressures in the labour market have eased, and sentiment among households and businesses has turned more pessimistic. Despite these developments, persistent inflation, inflation expectations above the target, and robust domestic demand warrant a cautious approach. Looking ahead, the formulation of near-term monetary policy will rely on data, particularly developments in economic activity, inflation, and inflation expectations.

The Central Bank of Iceland held its seven-day term deposit rate at 9.25% for the sixth consecutive time in its August 2024 meeting, keeping borrowing costs at their highest level since 2010. The Committee stated that the current policy stance is sufficient to bring inflation back to its target range, but persistent inflation and strong domestic demand call for caution. Inflation has risen marginally since the MPC’s May meeting, standing at 6.3% in July, with underlying inflation remaining high and price increases being widespread. However, inflation expectations were broadly unchanged but remain above the target. Moreover, some demand pressures persist in the economy and have subsided only slightly since the central bank’s last meeting.