- Decision
- Maintain
- Rate change
- 0 bps
- key interest rate
- 8%
The Monetary Policy Committee (MPC) of the Central Bank of Iceland unanimously held the key interest rate, the rate on seven-day term deposits, at 8.00% in October, judging a tight monetary stance appropriate because inflation and inflation expectations remain too high despite a clear slowdown in economic activity. Over the past year, the rate was cut by 25 basis points to 7.25% in November 2025, then raised in three 25-basis-point steps from March through August 2026 to 8.00%. Central bank facility rates range from 7.75% on current accounts to 9.75% on overnight loans, while the total reserve requirement is 3.00% from October 21. Headline inflation has risen to 5.9%, its highest in two years, mainly because of the Middle East conflict and higher public levies, while underlying inflation has remained just above 4%. Most indicators suggest inflation will fall fairly rapidly in 2027, but uncertainty remains considerable, particularly around the global economy and domestic labour market. The MPC said policy will continue to depend on economic activity, inflation and inflation expectations.
Rate evolution
From August 2025 to October 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, renewed tightening and an October hold. 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. On 7 October, it held the key interest rate at 8.00% as inflation reached 5.9%, its highest in two years, driven mainly by the effects of the Middle East conflict and hikes in public levies, while underlying inflation remained just over 4% and economic activity had clearly begun to slow, judging that persistent inflation and inflation expectations and uncertainty over the global economy and domestic labour market warranted a tight monetary stance even though most indicators suggested inflation would fall fairly rapidly in 2027.