- Decision
- Raise
- Rate change
- 25 bps
- key interest rate
- 8%
The Monetary Policy Committee (MPC) of the Central Bank of Iceland raised the seven-day term deposit rate by 25 basis points to 8.00%, judging that high inflation and inflation expectations required sufficient monetary restraint despite growing economic slack and a projected rapid inflation decline in 2027; four members supported the move and one preferred no change. Since August 2025, the MPC held the rate at 7.50%, cut it by 25 basis points in November, held it at 7.25% in February, and raised it by 25 basis points in each of March, May and August 2026. Inflation was 5.3% in July and is expected to rise further in coming months before tapering relatively quickly in 2027, while underlying inflation has stabilised and has begun easing by some measures. Headline inflation has been driven mainly by higher public levies and price increases linked to the war in the Middle East, although second-round effects appear less pronounced than initially feared. Uncertainty remains significant, particularly around the global economy and domestic labour market, and future policy will depend on economic activity, inflation and inflation 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.