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 7.75%. All Committee members voted in favour of the decision.
Inflation has been over 5% in 2026 to date and currently measures 5.2%. Inflation expectations have risen, particularly short-term expectations. However, they have risen less since the onset of the war in the Middle East than in the wake of Russia’s invasion of Ukraine four years ago. This is largely because capacity pressures have eased considerably.
According to the Bank’s newly published forecast, the outlook is for weaker GDP growth and higher unemployment than was projected in February. At the same time, a surge in oil and commodity prices and persistent domestic inflationary pressures have caused the inflation outlook to deteriorate as well. The economic outlook could worsen further if disruptions in the global oil market last longer than is currently assumed or if wage agreements are terminated later this year.
In view of the poorer inflation outlook and high inflation expectations, the MPC considers it appropriate to increase the Bank’s interest rates. The Committee is also prepared to tighten the monetary stance still further to ensure that inflation eases towards the target, even though this could further curtail economic activity. Nevertheless, monetary policy formulation will be determined, as before, by developments in economic activity, inflation, and inflation expectations.
No. 6/2026
May 20 2026