Economist predicts unlikely interest rate decrease amidst high inflation expectations in Iceland

A decrease in interest rates this week seems unlikely, according to an economist from the University of Reykjavik. The Central Bank is set to announce its interest rate decision on Wednesday.

Katrín Ólafsdóttir, an associate professor of economics, indicates that despite a slowdown in economic growth, inflation expectations remain high. She suggests that if these expectations do not change, the chances of a rate cut are slim.

Katrín further notes that even if rates were to be lowered, a significant reduction is improbable. Current inflation forecasts imply that inflation is expected to decline only gradually. “I wouldn’t anticipate a substantial rate cut,” she stated.

Currently, interest rates are higher than inflation, a trend that has persisted for some time, leading to a real interest rate that is considerable. Katrín believes that the monetary policy committee will approach any potential rate cuts cautiously.

Meanwhile, updated data from the Central Bank shows that card spending by Icelandic households has increased by 4% compared to the same period last year, which may signal rising consumer spending. However, the economics department at Landsbankinn argues that this does not necessarily mean enhanced consumer demand.

Katrín expresses skepticism about the entirety of the increased card usage being attributed to boosted consumption, highlighting that around 6% inflation means some of this spending is likely inflation-driven. “This suggests that the real increase in spending is probably much lower,” she concludes.