The Central Bank of Iceland published Monetary Bulletin 2025/3, keeping its interest rate unchanged at 7.5% and updating its macroeconomic and inflation projections. The forecast points to stronger activity in 2025 than previously assumed, while inflation is still expected to remain above target through 2026 before reaching target in the first half of 2027. Revised Statistics Iceland data show GDP contracted by 0.7% in 2024, rather than the previously reported 0.5% growth, and indicators suggest robust GDP growth in Q2 2025. Full-year GDP growth for 2025 is now projected at 2.3%, up from 1% in the May forecast, driven largely by base effects from weaker 2024 activity and stronger domestic demand, particularly investment, with the 2026-2027 outlook broadly unchanged. Labour market indicators suggest easing demand pressures, with unemployment expected to average 4.4% in 2025 and begin falling in 2026, alongside declining job vacancies and slower population growth. Inflation averaged 4% in Q2 2025 and was 4% in July, while underlying inflation was 3.9%; inflation expectations among market agents, households and businesses were broadly unchanged. Inflation is projected to rise to 4.5% in Q4 2025 and be somewhat higher early in the forecast horizon than in May, before easing to 3% by end-2026. Key uncertainties cited include the trade war and tariff developments, potential impacts on Icelandic exports to the US and possible EU tariffs on ferro-alloys and ferrosilicon, ongoing wars, and concern that slow progress on disinflation and poorly anchored expectations are complicating the path back to target.

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