- Decision
- Raise
- Rate change
- 25 bps
- key interest rate
- 7.75%
The Central Bank of Iceland’s Monetary Policy Committee raised the seven-day term deposit rate by 25 bp to 7.75 percent on 20 May 2026, citing a deteriorating inflation outlook—headline inflation has stayed above 5 percent this year and stands at 5.2 percent—and a further pickup in short-term inflation expectations amid still-persistent domestic pressures and higher oil and commodity prices. After cutting the key rate by a cumulative 100 bp between February and November 2025 and then lifting it by 25 bp in March 2026, the Committee has now delivered a second consecutive hike. The latest staff forecast points to weaker GDP growth and higher unemployment than projected in February, while capacity constraints have receded. Externally, the surge in global energy and commodity prices linked to the conflict in the Middle East is feeding into domestic costs and risks further inflation if oil market disruptions persist. The MPC reiterated that it stands ready to tighten policy further to secure convergence of inflation toward its 2½ percent target, even at the expense of additional cooling in economic activity.
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.