The Monetary Policy Committee (MPC) of the Central Bank of Iceland has decided to lower 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 7.25%. All Committee members voted in favour of the decision.
Headline inflation measured 4.3% in October, after rising by 0.2 percentage points from the previous month. It has remained close to 4% for nearly a year. Underlying inflation has developed in broadly the same manner.
Growth in domestic demand has slowed in line with a tight monetary stance, and signs of a turning point in economic activity are growing ever clearer. According to the Bank’s newly published forecast, the positive output gap appears to have closed, and GDP growth looks set to slow more than previously projected. This is driven largely by the series of export sector shocks and, just as importantly, the turmoil in the domestic mortgage market following the recent Supreme Court decision. As a result, the Bank forecasts that inflation will subside more rapidly than previously assumed. Pay rises are still sizeable, and inflation expectations continue to measure above target. Substantial uncertainty therefore remains.
The turbulence in the mortgage market is likely to cause households’ borrowing terms and financial conditions to tighten, even though the Bank’s real interest rate has held broadly unchanged. In view of this, the Committee considers it appropriate to offset this tightening by lowering interest rates.
However, further decisions to lower interest rates will depend on clear evidence that inflation is falling back to the Bank’s 2½% inflation target.
As before, near-term monetary policy formulation will be determined by developments in economic activity, inflation, and inflation expectations.
No. 18/2025
19 November 2025
The interest rates will be as follows:
- Overnight loans 9.00%
- Seven-day collateralised loans 8.00%
- Seven-day term deposits 7.25%
- Current accounts 7.00%