Iceland’s three largest banks forecast interest rate hike

The three largest commercial banks in Iceland expect the Central Bank of Iceland to raise its key interest rate by 0.25 percentage points on Wednesday, mbl.is reported. The rate would rise from 7.75 percent to 8 percent.

The Central Bank’s Monetary Policy Committee is due to announce its decision at 8.30am. A quarter-point increase would match the committee’s decisions in March and May, when rates were raised by 0.25 percentage points on both occasions.

Arion Bank’s research department said inflation had increased since the committee’s previous meeting and now stood at 5.3 percent. It forecasts inflation of 5.5 percent in the third quarter. The bank said the inflation outlook had worsened, inflation expectations remained too high and the assumptions underlying collective agreements had probably broken down.

Arion also pointed to continued uncertainty in oil markets because of the situation around the Strait of Hormuz, which could push inflation higher. “In our view, the question is not whether rates will rise, but by how much,” the research department said.

Íslandsbanki and Landsbankinn also forecast a 0.25 percentage point increase because of persistent inflation. Arion said tighter monetary policy would help reduce inflation and inflation expectations.

Kvika, however, expects the key rate to remain unchanged. Although inflation has not eased since the previous meeting and inflation expectations have risen slightly, Kvika said developments in underlying factors indicated that the spring’s rate increases had already delivered significant restraint. This should give the committee room to wait, it said.