Iceland raises rate 4th time as inflation outlook worsens

November 17, 2021

Iceland’s central bank raised its key interest rates for the fourth time, saying the outlook for inflation has deteriorated since August due to persistent increases in global prices, a more rapid rebound in domestic economic activity and rising wage costs.
The Central Bank of Iceland (CBI) raised its seven day deposit rate by 50 basis points to 2.0 percent and has now raised it 1.25 percentage point this year following hikes in May, August and October.
Iceland’s headline inflation rate rose to 4.5 percent in October from 4.4 percent in September, above the central bank’s 2.50 percent target range, while producer prices in September jumped 13.2 percent for the highest number since April 2015.
In its updated monetary bulletin, CBI raised its forecast for inflation to average 4.4 percent this year from its previous forecast of 4.2 percent and up from 2.8 percent in 2020.
For 2022 inflation is now seen averaging 3.5 percent, up from its August forecast of 2.8 percent, and in 2023 inflation is seen at 2.9 percent, up from 2.6 percent.
An improved outlook for exports led CBI to raise its outlook for economic growth next year to 5.1 percent from an earlier 3.9 percent while the estimate for 2021 growth was lowered slightly to 3.9 percent from 4.0 percent.

Iceland’s gross domestic product rose 7.3 percent year-on-year in the second quarter of this year after contracting the previous 5 quarters.
Iceland’s exports are seen rising 19.3 percent in 2022, up from the August forecast of 16.7 percent, while exports in 2021 are seen rising 14.1 percent, down from the previous forecast of 14.7 percent.
In 2020 Iceland’s exports plunged 30.2 percent.
For 2023 the country’s gross domestic product is seen expanding 2.6 percent, up from the previous forecast of 2.2 percent.

The Central Bank of Iceland issued the following press release:

“The Monetary Policy Committee (MPC) of the Central Bank of Iceland has decided to raise the Bank’s interest rates by 0.5 percentage points. The Bank’s key interest rate – the rate on seven-day term deposits – will therefore be 2%.

According to the Bank’s new macroeconomic forecast, published in the November Monetary Bulletin, the outlook is for GDP growth to measure about 4% in 2021, broadly in line with the August forecast. However, better prospects for exports result in an improved outlook for year-2022 GDP growth, which is expected to measure just over 5%. Nevertheless, significant uncertainty remains, and as before, economic developments will depend on the path the pandemic takes.

Inflation rose to 4.5% in October. The contribution from domestic cost pressures, rising house prices, and wage growth has accounted for a large share of inflation recently, but the effects of rising global oil and commodity prices have also grown stronger. Underlying inflation is lower, however, and has declined in recent months.

The inflation outlook has deteriorated somewhat since August, owing in part to more persistent global price increases, a more rapid rebound in domestic economic activity, and rising wage costs. The outlook is for inflation to continue rising in coming months but then start to ease, given that inflation expectations remain anchored to the target.

The MPC reiterates that it will apply the tools at its disposal to ensure that inflation eases back to the target within an acceptable time frame.”

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