Central Bank of Iceland reduces key interest rates for first time in over a year

The Central Bank of Iceland has announced a reduction in its key interest rates by 0.25 percentage points, bringing them down to 9%. This marks the first interest rate cut since August of the previous year. The Monetary Policy Committee met this morning to discuss the decision.

Inflation, which measured at 5.4% in September, has shown signs of easing. Though certain one-off factors have significantly influenced inflation rates, the overall frequency and magnitude of price increases have diminished. Underlying inflation has also decreased, alongside a reduction in inflation premiums in the bond market.

Despite these positive developments, the committee noted that persistent inflation, expectations exceeding target levels, and strong domestic demand require caution. The broader economic activity appears to be slowing, possibly reflecting tighter monetary policy, and there are indications of a cooling labor market coupled with growing pessimism among households and businesses.

The near-term formation of monetary policy will continue to depend on developments in economic activity, inflation, and inflation expectations. The revised rates are as follows: overnight loans at 10.75%, loans secured with collateral for seven days at 9.75%, seven-day fixed deposits at 9.0%, and business accounts at 8.75%.

This is the first alteration in interest rates in over a year, responding to inflation that has recently dropped more sharply than expected, influenced primarily by free school meals and a decline in travel costs. However, economists caution that recent improvements could be temporary, predicting that interest rates may hover around 7% by the end of next year.