The Monetary Policy Committee (MPC) of the Central Bank of Iceland has decided to raise the Bank’s interest rates by 0.25 percentage points. The Bank’s key interest rate – the rate on seven-day term deposits – will therefore be 7.50%. Three Committee members voted in favour of the decision, while two wanted to raise the key rate by 0.5 percentage points.
Most economic indicators now suggest that economic activity has slowed. In spite of this, inflation has risen again and now measures 5.2% for the second month in a row. To some extent, this is attributable to hikes in public levies and the resulting second-round effects. Added to it is the impact of negotiated private sector pay rises at the beginning of the year. Underlying inflation has risen and is at its highest in over a year. Inflation expectations have also begun to rise.
Steep increases in the price of oil and other commodities following the escalation of the conflict in the Persian Gulf have already led to further rises in inflation expectations in the bond market. If the conflict drags on, there is the risk that price increases will become more widespread, especially when inflation expectations are as high as they are at present. Thus, there is heightened risk that the review clause in wage agreements will be triggered later this year, which could exacerbate underlying inflationary pressures even more.
For these reasons, the MPC considers it appropriate to raise the Bank’s key rate once again. Furthermore, the Committee is prepared to tighten the monetary stance still further to ensure that inflation eases towards the target, even though this could further curtail economic activity. As before, monetary policy formulation will be determined by developments in economic activity, inflation, and inflation expectations.
No. 3/2026
18 March 2026