Iceland’s central bank raises policy rate to 8%

Iceland’s Central Bank has raised its policy rate by 0.25 percentage points to 8%, mbl.is reports. The decision was taken by the bank’s Monetary Policy Committee, with four members in favour and one voting to leave rates unchanged.

The rate on seven-day term deposits, the bank’s main policy rate, is now 8%.

The committee also raised rates by 0.25 percentage points at its previous decisions in May and March, after leaving them unchanged in February. Analysts at the country’s banks had forecast a rate increase.

Inflation has remained above 5% so far this year and stood at 5.3% in July. The central bank’s newly published forecast says inflation is expected to rise further in the coming months before easing relatively quickly next year.

The bank said the recent increase in measured inflation had primarily been driven by higher public charges and the effects of war in the Middle East. Underlying inflation has remained stable and has begun to ease according to some measures, in line with growing slack in the economy.

However, inflation expectations remain too high and underlying inflation is still excessive, the bank said. Uncertainty also remains significant, particularly regarding international economic developments and the outlook for the domestic labour market.

“In light of high inflation and elevated inflation expectations, the Monetary Policy Committee considers it appropriate to raise the bank’s rates to ensure sufficient monetary restraint,” the committee said in a statement.

It added that future monetary policy decisions would continue to depend on developments in economic activity, inflation and inflation expectations.