Iceland Interest Rate1998-2021 Data | 2022-2023 Forecast | Calendar | Historical

The Central Bank of Iceland raised its key interest rate by 25bps to 1 percent during its May meeting, amid high and persistent inflationary pressures. Latest economic data suggests a stronger than expected recovery, driven by a more robust domestic demand, with updated GDP growth forecasts standing at over 3% for 2021 and 5% for 2022. Signs of warning came specially from the widespread inflationary pressures, as prices are rising at a faster and more persistent way than previously expected, currently at an 8-year high of 4.6% YoY. Global factors such as supply-side disruptions and steep rises in the prices of oil and commodities, and country-specific ones like the increasing wages and house prices, and the depreciation of the króna, are the main causes for the upward trend in prices.

The Central Bank of Iceland kept its seven-day term deposit rate at a record low of 0.75% during its March 2021 meeting. Policymakers said that the economic contraction in 2020 (-6.6%) was smaller than the Bank forecast in February (-7.7%), as economic activity in Q4 turned out stronger than projected, and the contraction in the first three quarters of the year was somewhat smaller than previous figures had indicated. Meantime, recent surveys and high-frequency indicators suggest a continuing recovery in 2021, although the outlook is still highly dependent on the evolution of the pandemic and the pace of vaccination. The Committee also noted that inflation slowed to 4.1% in February and it is expected to start to ease this spring, although the near-term outlook has probably deteriorated since February, in particular as global oil and commodity prices have risen recently. Furthermore, inflation expectations have risen slightly.

The Central Bank of Iceland kept its seven-day term deposit rate at a record low of 0.75% during its February 2021 meeting. Policymakers said that the economic contraction in 2020 is now projected to be smaller than the Bank forecast in November, as domestic demand appears to have been stronger than it was previously assumed. For 2021, the outlook is also for domestic demand to grow more than previously projected, whereas the outlook for exports has deteriorated. The Committee also noted that inflation rose in January, measuring 4.3%, as the exchange rate pass-through from the depreciation of the króna still weighs heavily in imported goods prices. At the same time, domestic goods prices have risen as well, to some extent reflecting strong domestic demand. The outlook is for inflation to measure 3.9% in Q1/2021 but then fall relatively quickly over the course of the year, as there is still a sizeable slack in the economy and the króna has appreciated in recent months.

The central bank of Iceland cut its key bank rate by 25bps to a new record low of 0.75% on November 18th 2020. Policymakers noticed that the autumn surge in COVID-19 cases and the tightened public health measures have weakened the economic rebound that began in Q3, following a historically large contraction in Q2. The economic outlook has therefore deteriorated, and the central bank expects the GDP to shrink by 8.5% this year, a full 1 percentage point more than was forecasted in August. GDP growth is projected to be weaker in 2021 as well.