- Decision
- Lower
- Rate change
- 25 bps
- key interest rate
- 7.25%
The Central Bank of Iceland’s Monetary Policy Committee cut the seven-day term deposit rate by 25 bp to 7.25 per cent, judging that slowing domestic demand, a closed output gap and tighter household borrowing conditions after a Supreme Court–related mortgage market shock will hasten a decline in inflation despite still-strong wage growth and above-target inflation expectations. After cumulative policy easing of 75 bp since February, the corridor now stands at 9.00 per cent for overnight loans, 8.00 per cent for seven-day collateralised loans, and 7.00 per cent on current accounts. Headline inflation edged up to 4.3 per cent in October but has hovered near 4 per cent for almost a year; the central bank’s new forecast sees GDP growth slowing more than previously expected as export shocks weigh on activity. The Committee said it acted to offset the mortgage-driven tightening of credit conditions and warned that any further rate reductions will hinge on “clear evidence” of inflation moving back toward the 2.5 per cent target, with near-term policy guided by incoming 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.