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Iceland raises interest rate again to tame inflation

posted onNovember 17, 2021

The Monetary Policy Committee (MPC) of the Central Bank of Iceland (CBI) chose to raise the key interest rate by 50 basis points, taking it to 2% during its meeting on Thursday (Nov. 17).

The central bank, the first in Western Europe to raise rates since Covid-19 struck, had raised its key rate by 25 basis points each in May, August and October. 

The MPC noted that annual inflation rate in Iceland ticked up to 4.5% in October, mainly driven by prices of housing & utilities but the contributions from global oil and commodity prices has also grown stronger.

The Consumer Price Index excluding housing increased by 0.47% during October, however, and twelve-month inflation thus measured was 3.0%. The numbers show both that there is a significant difference between inflation with and without the housing component, and that inflationary pressures are rather widespread at present. 

“The inflation outlook has deteriorated somewhat since August, owing in part to more persistent global price increases, a more rapid rebound in domestic economic activity, and rising wage costs,” rate setters in Reykjavik said.

According to the Bank’s new macroeconomic forecast, published in theNovember Monetary Bulletin, the outlook is for GDP growth to measure about 4% in 2021, broadly in line with the August forecast.
Inflation is seen above 4% through the year-end, before aligning with the central bank's 2.5% target in the Q3 of 2022. 

Policymakers also reiterated their commitment to apply the tools at their disposal to ensure that inflation returns to target within an acceptable time range.

Next year GDP growth is expected to surpass 5% amid better export prospects.

Nevertheless, significant uncertainty remains, and as before, economic developments will depend on the path the pandemic takes, the central bank said. 

The north Atlantic island, which heavily depends on tourism, took a bigger hit from the pandemic last year than its Nordic peers, triggering a string of interest-rate cuts.

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