In a keynote speech at the Reykjavík Economic Conference, Central Bank of Iceland Governor Ásgeir Jónsson set out how the Bank is combining tight but gradually normalising monetary policy with macroprudential and supervisory tools to address domestically driven inflation, housing-market pressures and capital-flow risks in a small open economy. The policy rate was taken up to 9.25% during the tightening cycle and, after four rate cuts as inflation progressed lower, has been reduced to 7.75%. The speech framed the stance as still restrictive, with the real policy rate kept close to 4% over the past year versus an estimated natural rate of 2.25%, and attributed Iceland’s inflation largely to domestic factors such as labour shortages, wage growth and housing dynamics. The Bank has not conducted quantitative easing and therefore holds no domestic bonds to unwind, and it described a preference for macroprudential tools over capital controls to manage the “global financial cycle”, alongside foreign exchange interventions and regular FX purchases to bolster reserves. Measures highlighted included limits on short-term external debt, constraints on derivatives through a cap on banks’ forward positions of 50% of equity, requirements for foreign participation in bond markets to transact via the FX market, high bank capital ratios of around 20% including a 2.5% countercyclical buffer, borrower-based limits such as loan-to-value and debt service-to-income caps, and restrictions on foreign-currency lending to entities without export earnings. Governor Jónsson also pointed to the 2020 merger of the Central Bank and the Financial Supervisory Authority and the Bank’s three-committee model, alongside conduct-focused supervision including fit-and-proper requirements, bonus caps, and transparent enforcement powers including the ability to intervene directly in specific institutions under crisis-era emergency powers.
Central Bank of Iceland 2025-05-09
Central Bank of Iceland Governor outlines policy-rate easing to 7.75% and macroprudential toolkit for housing and capital-flow risks
Central Bank of Iceland Governor Ásgeir Jónsson outlined the strategy of combining tight but gradually normalizing monetary policy with macroprudential and supervisory tools to tackle inflation, housing pressures, and capital-flow risks. The policy rate, reduced to 7.75% after four cuts, remains restrictive with a real rate near 4%. The Bank favors macroprudential measures over capital controls, highlighting tools like high bank capital ratios, borrower-based limits, and foreign exchange interventions.