- Decision
- Maintain
- Rate change
- 0 bps
- key interest rate
- 7.25%
The Monetary Policy Committee of the Central Bank of Iceland left its key seven-day term deposit rate unchanged at 7.25 percent on 4 February 2026, judging that persistent underlying price pressures and still-elevated inflation expectations outweigh the recent easing in economic activity and a cooling labour market. After a cumulative 75 bp reduction between February and November 2025, the policy stance has now been on hold for the past two meetings. Operational rates remain at 9.00 percent for overnight loans, 8.00 percent for seven-day collateralised loans and 7.00 percent for current accounts. Headline inflation rose to 5.2 percent in January, largely because of higher vehicle levies, yet price increases remain broad-based; the Bank’s new forecast shows the output gap closed, GDP growth set to stay relatively weak, and inflation easing later in the year, though sizeable wage hikes keep risks tilted upward. The Committee reiterated that any further rate cuts will hinge on “clear evidence” of progress toward the 2.5 percent target and that upcoming decisions will track developments in 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.