Iceland’s central bank held borrowing costs steady, capping a seven-month tightening phase, as the economy dogged by persistent inflation shows signs of cooling.
Policymakers at Sedlabanki in Reykjavik unanimously kept the 7-day term deposit rate at 8.0% on Wednesday, in line with forecasts from Islandsbanki hf and Landsbankinn hf, among the nation’s largest lenders. The central bank had raised interest rates by a quarter point in each of the three prior meetings.
“Although economic activity has clearly begun to slow, both measured and underlying inflation are still too high, as are inflation expectations,” officials led by Governor Asgeir Jonsson said in a statement .
Iceland’s price gains have exceeded the central bank’s target since mid-2020, with readings this year topping 5%. Recently, inflation has been largely imported, with increases in global oil prices exacerbated by a tax increase for petrol last month when a temporary lower rate on value added tax on gasoline expired. Still, domestic price pressure has eased with higher unemployment, cooling of the housing market and a slowdown of payment card turnover.
Uncertainty about wage developments still persists. Unions face a deadline on Thursday to decide whether to abandon a collective wage agreement in line with a clause triggered in August when inflation exceeded 4.7%.
Two labor unions, including Iceland’s biggest trade group, VR, are threatening to terminate the deal if the employers’ lobby, SA, won’t meet their demands. Other unions agreed to stick with the agreement late on Tuesday. The government has signaled it will aid the deal with measures which include lowering public fees.
“Most indicators suggest that inflation will fall fairly rapidly in 2027,” officials at the central bank said, noting “considerable uncertainty” from both the labor market and the global economy.