- Decision
- Lower
- Rate change
- 50 bps
- key interest rate
- 8%
The Monetary Policy Committee of the Central Bank of Iceland lowered the seven-day term deposit rate by 50 bp to 8.0 percent on 5 February 2025, judging that falling headline inflation (4.6 percent in January) and the lowest underlying inflation in three years warrant some easing even as demand growth slows and the positive output gap narrows. The Bank will maintain a corridor of 7.75–9.75 percent, with current-account, seven-day collateralised loan and overnight loan rates set at 7.75 percent, 8.75 percent and 9.75 percent, respectively. Housing-market activity and house-price inflation have cooled, yet overall economic activity appears stronger than suggested by preliminary national accounts, and wage costs continue to rise, leaving inflation pressures and expectations still elevated. The Committee also cited heightened global economic uncertainty. It reiterated that monetary policy will remain tight and that future decisions will hinge on incoming data on activity, inflation and expectations, signalling caution despite the current disinflation trend.
Rate evolution
From August 2025 to August 2026, the Central Bank of Iceland’s key interest rate ended 50 basis points higher at 8.00%, after an autumn pause, a short-lived cut, and then a return to tightening. The initial holds reflected cooling domestic demand and easing capacity pressures under tight policy, but activity remained fairly resilient, wage rises were sizeable, inflation expectations stayed above target, and the Central Bank said conditions for easing the real interest rate had not yet emerged. It cut by 25 basis points in November to offset tighter financial conditions from mortgage-market turmoil as the output gap closed and growth slowed, yet stressed that pay growth, above-target expectations and uncertainty meant further easing required clear evidence that inflation was returning to the 2½% target. By March and May, however, with inflation above 5%, underlying pressures and expectations rising, and oil and commodity price shocks from the Middle East conflict worsening the outlook, the Committee raised rates twice, judged the inflation outlook poorer despite weaker growth and higher unemployment, and signalled it was prepared to tighten further if inflation risks persisted.
In August, the Committee raised the policy rate by another 25 basis points after inflation measured 5.3% in July, citing high inflation and inflation expectations and the need to ensure sufficient monetary restraint. The Central Bank forecast inflation would rise further before tapering off relatively quickly in 2027, while noting that underlying inflation had stabilised and had begun to ease by some measures as economic slack grew, second-round effects appeared less pronounced than initially feared, and the market breakeven inflation rate had receded.