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 7.50%. All Committee members voted in favour of the decision.
Inflation measured 4.2% in April and has fallen markedly from its peak two years ago. According to the Central Bank’s newly published forecast, it will remain close to 4% through the year-end and then start to ease towards the target. The inflation outlook remains highly uncertain, however, not least because of the recent global economic turmoil.
Growth in domestic demand has subsided in line with a tight monetary stance. Capacity pressures in the economy have therefore eased steadily, as can be seen in the cooling of the housing and labour markets. Even so, economic activity still appears resilient, as is reflected, for instance, in recently published payment card turnover data. In addition, wage costs have continued to rise briskly, and while inflation expectations have fallen, they remain above target.
Although inflation has eased and inflation expectations have fallen in the recent term, inflationary pressures remain. The conditions that would enable an easing of the real interest rate have therefore not yet emerged. Further interest rate cuts will depend on whether inflation moves closer to the Bank’s 2½% target.
As before, near-term monetary policy formulation will be determined by developments in economic activity, inflation, and inflation expectations.
No. 7/2025
21 May 2025
The interest rates will be as follows:
- Overnight loans 9.25%
- Seven-day collateralised loans 8.25%
- Seven-day term deposits 7.50%
- Current accounts 7.25%