- Decision
- Lower
- Rate change
- 25 bps
- key interest rate
- 7.75%
The Monetary Policy Committee of the Central Bank of Iceland cut its seven-day term deposit rate by 25 bp to 7.75 percent on 19 March, judging that broad-based disinflation—headline CPI eased to 4.2 percent in February, a four-year low, with underlying measures also falling—warranted a modest easing even as a firm stance is still needed. The move follows a 50 bp reduction in February that lowered the key rate to 8.0 percent. The accompanying corridor was adjusted to 9.50 percent for overnight loans, 8.50 percent for seven-day collateralised loans and 7.50 percent for current accounts, preserving a tight policy setting. Domestic demand growth and capacity pressures have moderated and housing activity has slowed, but high-frequency data point to stronger household consumption while steep wage increases keep inflation expectations above target. Against a backdrop of significant global economic uncertainty, the committee said monetary policy would continue to be guided by incoming data on activity, inflation and expectations, underscoring the need for caution despite the improving inflation picture.
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.