The Central Bank of Iceland published Monetary Bulletin 2025/2 alongside the Monetary Policy Committee’s decision to cut interest rates by 0.25 percentage points, taking the key rate on seven-day term deposits to 7.50%. The updated forecast flags a weaker outlook for both trading partners and Iceland as global uncertainty rises, and projects inflation returning to target at the beginning of 2027. Trading partner GDP growth was 1.9% in Q4 2024, but is now expected to be weaker in 2025 than in 2024 and 0.4 percentage points below the February projection, mainly reflecting the US trade war and tariff-driven deterioration in the global inflation outlook. Iceland’s GDP grew 0.5% in 2024, above the February forecast after revisions by Statistics Iceland; 2025 growth is projected at 1% (0.6 percentage points lower than in February) as base effects from stronger 2024 activity and the adverse effects of the trade war outweigh stronger private consumption. Labour market indicators point to further cooling, with unemployment projected to average 4.7% in 2025 before declining in 2026, while revisions imply a larger positive output gap and a later opening of economic slack than previously assumed. Inflation eased in Q1 but rose to 4.2% in April, with underlying inflation at 4% and expectations still above target, although the May survey shows long-term expectations falling to about 3%. Inflation is forecast to taper to 3.8% in Q3 and to run somewhat above the February path in the near term, with a stronger króna partly offsetting the impact of slightly narrower slack; the baseline assumes trade-war effects on inflation are small, but uncertainty is high and outcomes depend on how demand and supply are affected and on the persistence of cost increases.
Central Bank of Iceland 2025-05-21
Central Bank of Iceland cuts key interest rate to 7.50% and updates macro forecast amid global trade war
The Central Bank of Iceland's Monetary Policy Committee reduced the key interest rate by 0.25 percentage points to 7.50%, citing a weaker economic outlook amid global uncertainty and projecting inflation to reach target by early 2027. The updated forecast anticipates slower GDP growth for Iceland and its trading partners in 2025, influenced by the US trade war, with inflation expected to moderate but remain above target in the near term.