The Monetary Policy Committee of the Central Bank of Iceland decided to cut the Bank’s interest rates by 0.25 percentage points, taking the key interest rate on seven-day term deposits to 7.25%. The decision was unanimous. Headline inflation was 4.3% in October, broadly stable around 4% for nearly a year, with underlying inflation evolving similarly. The Committee pointed to slowing domestic demand under a tight monetary stance and increasingly clear signs of a turning point in activity, with the Bank’s new forecast indicating the output gap has likely closed and GDP growth set to slow more than previously projected, driven by export-sector shocks and turmoil in the domestic mortgage market following a Supreme Court decision. The forecast implies inflation will ease faster than previously assumed, although pay rises remain sizeable and inflation expectations are still above target, leaving substantial uncertainty.
Central Bank of Iceland 2025-11-19
Central Bank of Iceland lowers key interest rate by 25bp to 7.25%
The Central Bank of Iceland's Monetary Policy Committee unanimously cut interest rates by 0.25 percentage points, setting the key rate on seven-day term deposits at 7.25%, amid stable inflation and slowing domestic demand. The Bank's forecast suggests a closing output gap and slower GDP growth due to export-sector shocks and mortgage market turmoil, with inflation expected to ease faster despite ongoing pay rises and above-target inflation expectations.