Economists predict potential interest rate cut in November amid inflation decline in Iceland

Economic analysts anticipate a potential cut in interest rates in November, contingent upon a continued decline in inflation. Hafsteinn Hauksson, chief economist at Kvika Bank, suggests that inflation may have decreased sufficiently for the Central Bank to justify a reduction in rates next month. While there has been a noted increase in household arrears, this does not raise alarm as historical data indicates low levels of delinquency over the past few years.

Hauksson emphasizes that the economy is stabilizing after a period of growth resulting from the pandemic recovery. He identifies high interest rates set by the Central Bank and challenges in export industries as primary factors restraining the economy. Although he acknowledges the uptick in payment difficulties, he contextualizes this within a broader trend of low delinquencies previously.

Consumer expenditure has been restricted during the pandemic, yet there has been an accumulation of savings among households. However, shifts in financial stability could alter this dynamic, as highlighted by a recent report from the Central Bank’s financial stability committee.

Currently, the Central Bank has maintained a steady interest rate of 9.25% for over a year, despite ongoing calls for a reduction. With inflation at approximately 6%—well over the target—it remains crucial to monitor economic indicators leading up to the next monetary policy meeting.

Looking ahead, Hauksson expresses optimism that by the time the monetary policy committee convenes in November, inflation could approach the 5.5% to 5.6% range, thereby creating favorable conditions for a potential interest rate cut of a quarter percent.