- Decision
- Maintain
- Rate change
- 0 bps
- key interest rate
- 7.5%
The Monetary Policy Committee (MPC) of the Central Bank of Iceland left the seven-day term deposit rate unchanged at 7.50% on 8 October 2025, judging that, although economic activity has slowed and demand pressures have eased, September inflation quickened to 4.1%—still above the 2.5% target—amid sizeable wage rises and inflation expectations that remain elevated. After cutting the key rate by a cumulative 100 bp between February and May, the MPC has held it at 7.50% since. The interest-rate corridor was maintained, with overnight loans at 9.25%, seven-day collateralised loans at 8.25% and current accounts at 7.25%. The Committee said many indicators are moving favourably, but the conditions for lowering the real rate have not yet materialised and reiterated that any future easing will depend on inflation moving closer to target, with near-term policy guided by data on activity, prices and expectations.
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.