Landsbankinn expects Iceland rate cuts to begin in February

Iceland’s central bank could begin cutting interest rates in February, with inflation expected to fall below 5% in the first quarter, according to a new forecast from Landsbankinn’s research department, reported by mbl.is.

The bank expects inflation to have peaked at 5.9% this autumn and says the central bank’s rate-hiking cycle is over. Lower uncertainty around wage agreements, more moderate increases in fees and charges, and weaker demand are expected to ease inflation and create room for rate cuts after the turn of the year.

Landsbankinn forecasts economic growth of 1.3% in 2026 and 1.5% in 2027, rising to 2% in 2028. Inflation is projected to average 5.5% this year, 4.3% next year and 3.4% in 2028.

The bank warns that the coming winter could be difficult. Unemployment is expected to remain high, averaging 4.5% this year and 4.4% next year, while household consumption is forecast to grow by just 0.9% in 2026.

The housing market is expected to remain subdued. Home prices are forecast to rise by 1.9% this year and 2% next year, which would mean a decline in real terms in both years.

Exports are expected to increase next year, supported by higher aluminium production, more flight capacity and growth in data centres, aquaculture and pharmaceutical production. The research department says the outlook for Iceland’s economy is gradually improving despite slow growth in the coming period.